UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
March 31, 2019or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 001-38299
LEVEL BRANDS,
cbdMD, INC.
(Exact Name of Registrant as Specified in its Charter)
North Carolina | | 47-3414576 |
State or Other Jurisdiction of Incorporation or Organization | | I.R.S. Employer Identification No. |
| | |
4521 Sharon Rd, suite 450, Charlotte, NC | | 28211 |
Address of Principal Executive Offices | | Zip Code |
704-445-5800704-362-6286
Registrant’s Telephone Number, Including Area Code
Not Applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐ ☑ | Smaller reporting company ☑ |
Emerging growth company ☑ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐¨ No ☐¨
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
common | YCBD | NYSE American |
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
8,118,92825,420,356 shares of common stock are issued and outstanding as of August 09, 2018May 10, 2019
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| PART I-FINANCIAL INFORMATION | Page No. |
| | No |
| Financial Statements. | 5 |
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| PART I-FINANCIAL INFORMATION | |
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ITEM 1. | Financial Statements.
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ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. | 34 38 |
34 | | |
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk. | 44 46 |
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ITEM 4. | Controls and Procedures. | 46 |
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| PART II - OTHER INFORMATION | |
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ITEM 1. | Legal Proceedings. | 45 47 |
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ITEM 1A. | Risk Factors. | 45 |
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ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 45 49 |
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ITEM 3. | Defaults Upon Senior Securities. | 45 49 |
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ITEM 4. | Mine Safety Disclosures. | 45 49 |
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| Other Information.Information
| 4649
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| Exhibits.Exhibits
| 4650
|
OTHER PERTINENT INFORMATION
Unless the context otherwise indicates, when used in this report, the terms Level Brands,cbdMD,” “we,” “us, “our” and similar terms refer to Level Brands,cbdMD, Inc., a North Carolina corporation formerly known as Level Brands, Inc, and initially formed as Level Beauty Group, Inc., and our subsidiaries CBD Industries, LLC, formally known as cbdMD LLC, a North Carolina limited liability company which we refer to as “CBDI”, Beauty and Pinups, LLC, a North Carolina limited liability company which we refer to as “BPU”, I | M 1, LLC, a California limited liability company, which we refer to as “I’M1”, Encore Endeavor 1 LLC, a California limited liability company which we refer to as “EE1” and Level H&W, LLC, a North Carolina limited liability company, which we refer to as “Level H&W”. In addition, “fiscal 2017"2018" refers to the year ended September 30, 2017,2018, "fiscal 2018"2019" refers to the year ending September 30, 2018, "third quarter of 2017" refers to the three months ended June 30, 2017 and "third2019, "second quarter of 2018" refers to the three months ended June 30, 2018.March 31, 2018 and "second quarter of 2019" refers to the three months ended March 31, 2019.
Unless otherwise indicated, all share and per share information contained herein gives pro forma effect to the 1:5 reverse stock split of our common stock, which was effective December 5, 2016. The information contained on our websites at www.levelbrands.com, www.cbdmd.com,www.beautyandpinups.com, www.im1men.com, and www.im1men.comwww.encoreendeavor1.com are not part of this report.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:
●
our ability to successfully integrate the operations of Cure Based Development following the Mergers;
our material dependence on our relationships with kathy ireland® Worldwide and certain of its affiliates;
the significant dilution to our shareholders of the issuance of the shares of our common stock as the consideration for the Mergers;
our limited operating history;
with the closing of the transaction with Cure Based Development, the need to meet the initial listing standards of the NYSE American;
the limited operating histories of our subsidiaries;
the evolving and highly competitive market in which cbdMD operates;
the evolution of the laws and regulations impacting cbdMD
risks associated with any failure by us to maintain an effective system of internal control over financial reporting;
the terms of various agreements with kathy ireland® Worldwide and possible impacts on our management's abilities to make certain decisions regarding the operations of our company;
our dependence on consumer spending patterns;
our history on reliance on sales from a limited number of customers, including related parties;
risks associated with our failure to effectively promote our brands;
our ability to identify and successfully acquire additional brands and trademarks;
the operating agreements of our I'M1 and EE1 subsidiaries;
the accounting treatment of securities we accept as partial compensation for services;
our ability to liquidate those securities;securities we accept as partial compensation for services;
●
our status as an inadvertent investment company at March 31, 2018 and the possible impact of the Investment Company Act of 1940 on our business, operations and financial condition;
●
the possible need to raise additional capital in the future;
terms of the contracts with third parties in each of our divisions;
possible conflicts of interest with kathy ireland® Worldwide;
possible litigation involving our licensed or manufactured products;
our ability to effectively compete and our dependence on market acceptance of our brands;
the lack of long-term contracts for the purchase of products from our professional products division;
our ability to protect our intellectual property;
additional operational risks associated with our professional products division;
risks associated with developing a liquid market for our common stock and possible future volatility in its trading price;
risks associated with any future failure to satisfy the NYSE American LLC continued listing standards;
dilution to our shareholders from the issuance of additional shares of common stock by us and/or the exercise of outstanding options and warrants and the vesting of restricted stock awards;warrants;
risks associated with our status as an emerging growth company;
risks associated with control by our executive officers, directors and affiliates;
risks associated with future sales of our common stock by existing shareholders;
our failure to maintain an effective system of internal control over financial reporting;
risks associated with unfavorable research reports; and
●
risks associated with our status as a public company;articles of incorporation, bylaws and
●
risks associated with North Carolina law.
Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part II, Item 1A. Risk Factors appearing later in this report, Part I, Item 1A. - Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 20172018 as filed with the Securities and Exchange Commission on December 26, 201712, 2018 (the "2017"2018 10-K") as well as our other filings with the SEC. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.
PART
PART 1 - FINANCIAL INFORMATION
LEVEL BRANDS,cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2018MARCH 31, 2019 AND SEPTEMBER 30, 20172018
| | |
| | |
| | |
Assets | | |
| | |
Current assets: | | |
Cash and cash equivalents | $4,639,587 | $4,282,553 |
Accounts receivable | 694,390 | 307,874 |
Accounts receivable - related party | 1,338,956 | 1,537,863 |
Accounts receivable other | 380,917 | 1,743,874 |
Merchant reserve | 626,160 | - |
Marketable securities | 1,373,133 | 1,050,961 |
Investment other securities | 1,159,112 | 1,159,112 |
Note receivable | 477,000 | 459,000 |
Note receivable - related party | - | 156,147 |
Inventory | 2,065,465 | 123,223 |
Inventory prepaid | 306,870 | - |
Deferred issuance costs | - | 28,049 |
Prepaid consulting agreement | 50,000 | 200,000 |
Prepaid rent | 108,000 | 180,000 |
Prepaid services with stock | 270,437 | - |
Prepaid expenses and other current assets | 654,196 | 561,491 |
Total current assets | 14,144,223 | 11,790,147 |
| | |
Other assets: | | |
Property and equipment, net | 817,413 | 53,480 |
Goodwill | 55,144,269 | - |
Intangible assets, net | 24,729,322 | 3,173,985 |
Total other assets | 80,691,004 | 3,227,465 |
| | |
Total assets | $94,835,227 | $15,017,612 |
| | |
| | |
| | |
Assets | | |
| | |
Current assets: | | |
Cash and cash equivalents | $5,423,862 | $284,246 |
Accounts receivable | 186,864 | 141,462 |
Accounts receivable - related party | 1,350,000 | 712,325 |
Accounts receivable other | 1,376,443 | 12,440 |
Accounts receivable other – related party | - | 236,364 |
Marketable securities | 1,321,196 | - |
Investment - other securities | 1,159,112 | 859,112 |
Note receivable – related party | 161,573 | 276,375 |
Inventory | 475,733 | 588,197 |
Deferred initial public offering costs | - | 497,735 |
Prepaid advisory agreements, director fees, and rent | 750,790 | - |
Prepaid expenses and other current assets | 315,582 | 85,420 |
Total current assets | 12,521,155 | 3,693,676 |
| | |
Other assets: | | |
Property and equipment, net | 39,123 | 135,476 |
Long term note receivable | 450,000 | - |
Intangible assets, net | 3,460,006 | 3,240,287 |
Total other assets | 3,949,129 | 3,375,763 |
| | |
Total assets | $16,470,284 | $7,069,439 |
See Notes to Condensed Consolidated Financial Statements
3
LEVEL BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2018 AND SEPTEMBER 30, 2017
(continued)
Liabilities and shareholders' (deficit) equity | | |
| | |
Current liabilities: | | |
Accounts payable | $163,042 | $397,601 |
Accounts payable - related party | 529,779 | 67,879 |
Deferred revenue | 163,333 | 41,417 |
Accrued expenses | 25,591 | 123,823 |
Accrued expenses - related party | 320,000 | 892,805 |
Total current liabilities | 1,201,745 | 1,523,525 |
| | |
Long term liabilities | | |
Long term liabilities - related party | - | 360,000 |
Other long term liability | 8,004 | - |
Deferred tax liability | 43,000 | 37,000 |
Total long term liabilities | 51,004 | 397,000 |
| | |
Total liabilities | 1,252,749 | 1,920,525 |
| | |
Level Brands, Inc. shareholders' equity: | | |
Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued and outstanding | - | - |
Common stock, authorized 150,000,000 shares, $0.001 par value, | | |
8,118,928 and 5,792,261 shares issued and outstanding, respectively | 8,119 | 5,792 |
Additional paid in capital | 21,509,688 | 10,463,480 |
Accumulated other comprehensive income (loss) | (1,923,304) | - |
Accumulated deficit | (5,779,879) | (6,257,421) |
Total Level Brands, Inc. shareholders' equity | 13,814,624 | 4,211,851 |
Non-controlling interest | 1,402,911 | 937,063 |
Total shareholders' equity (deficit) | 15,217,535 | 5,148,914 |
| | |
Total liabilities and shareholders' equity (deficit) | $16,470,284 | $7,069,439 |
See Notes to Condensed Consolidated Financial Statements
4
LEVEL BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2018 AND 2017
(Unaudited)
| | | | |
| | | | |
| | | | |
| | | | |
Sales | $1,851,116 | $1,353,590 | $5,440,653 | $3,416,862 |
Sales - related party | 1,350,000 | 514,000 | 1,550,000 | 782,550 |
Total Gross Sales | 3,201,116 | 1,867,590 | 6,990,653 | 4,199,412 |
Allowances | (2,686) | (80,581) | (23,558) | (804,025) |
Net sales | 1,848,430 | 1,273,009 | 5,417,095 | 2,612,837 |
Net sales - related party | 1,350,000 | 514,000 | 1,550,000 | 782,550 |
Total Net Sales | 3,198,430 | 1,787,009 | 6,967,095 | 3,395,387 |
Cost of sales | 1,106,706 | 261,420 | 1,858,651 | 822,556 |
| | | | |
Gross Profit | 2,091,724 | 1,525,589 | 5,108,444 | 2,572,831 |
| | | | |
Operating expenses | 1,464,239 | 853,670 | 4,089,006 | 2,536,586 |
Income (Loss) from operations | 627,485 | 671,919 | 1,019,438 | 36,245 |
Debt conversion expense | - | (446,250) | - | (446,250) |
Other than temporary impairment on marketable securities | - | (175,000) | - | (175,000) |
Gain (Loss) on disposal of property and equipment | - | - | (69,311) | - |
Interest expense | (232) | (229,220) | (737) | (500,353) |
Income (Loss) before provision for income taxes | 627,253 | (178,551) | 949,390 | (1,085,358) |
| | | | |
Benefit (Provision) for income taxes | (62,000) | 36,642 | (6,000) | (42,250) |
Net Income (Loss) | 565,253 | (141,909) | 943,390 | (1,127,608) |
Net Gain (Loss) attributable to noncontrolling interest | 359,179 | 68,781 | 465,848 | 272,798 |
| | | | |
Net Income (Loss) attributable to Level Brands, Inc. common shareholders | $206,074 | $(210,690) | $477,542 | $(1,400,406) |
| | | | |
Net Income (Loss) per share: | | | | |
Basic | $0.03 | $(0.04) | $0.06 | $(0.34) |
Diluted | $0.03 | $- | $0.06 | $- |
| | | | |
Weighted average number of shares Basic: | 8,075,341 | 4,686,947 | 7,406,114 | 4,128,541 |
Weighted average number of shares Diluted: | 8,092,931 | - | 7,428,504 | - |
See Notes to Condensed Consolidated Financial Statements
5
LEVEL BRANDS,
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2019 AND SEPTEMBER 30, 2018
(continued)
| | |
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| | |
Liabilities and shareholders' equity (deficit) | | |
| | |
Current liabilities: | | |
Accounts payable | $852,537 | $473,717 |
Accounts payable - related party | - | 7,860 |
Deferred revenue | 33,333 | 161,458 |
Note payable – related parties | 561,770 | - |
Customer deposit - related party | 90,000 | - |
Accrued payroll | 287,906 | - |
Accrued expenses | 27,481 | 6,920 |
Accrued expenses - related party | 18,265 | 320,000 |
Total current liabilities | 1,871,292 | 969,955 |
| | |
Long term liabilities | | |
Other long term liabilities | 6,734 | 7,502 |
Contingent liability | 102,267,557 | - |
Long term liabilities - to related party | 184,300 | - |
Deferred tax liability | 3,921,000 | 21,000 |
Total long term liabilities | 106,379,591 | 28,502 |
| | |
Total liabilities | 108,250,883 | 998,457 |
| | |
cbdMD, Inc. shareholders' equity (deficit): | | |
Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued and outstanding | - | - |
Common stock, authorized 150,000,000 shares, $0.001 par value, | | |
10,170,356 and 8,123,928 shares issued and outstanding, respectively | 10,170 | 8,124 |
Additional paid in capital | 28,383,374 | 21,781,095 |
Accumulated other comprehensive income (loss) | - | (2,512,539) |
Accumulated deficit | (43,083,487) | (6,669,497) |
Total cbdMD, Inc. shareholders' equity (deficit) | (14,689,943) | 12,607,183 |
Non-controlling interest | 1,274,287 | 1,411,972 |
Total shareholders' equity (deficit) | (13,415,656) | 14,019,155 |
| | |
Total liabilities and shareholders' equity (deficit) | $94,835,227 | $15,017,612 |
| | |
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)OPERATIONS
FOR THE THREE AND NINESIX MONTHS ENDED JUNE 30,MARCH 31, 2019 AND 2018 AND 2017
(Unaudited)
| | | | |
| | | | |
| | | | |
| | | | |
Net Income (Loss) | $565,253 | $(141,909) | $943,390 | $(1,127,608) |
Other Comprehensive Income: | | | | |
Net Unrealized Gain (Loss) on Marketable Securities, net of tax | (1,326,727) | - | (1,923,304) | - |
Comprehensive Income (Loss) | (761,474) | (141,909) | (979,914) | (1,127,608) |
| | | | |
Comprehensive Income (loss) attributable to non-controlling interest | 359,179 | 68,781 | 465,848 | 272,798 |
Comprehensive Income (Loss) attributable to Level Brands, Inc. common shareholders | $(1,120,653) | $(210,690) | $(1,445,762) | $(1,400,406) |
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Sales | $7,790,436 | $3,031,654 | $9,257,899 | $3,480,447 |
Sales related party | - | 54,545 | - | 309,090 |
Total Gross Sales | 7,790,436 | 3,086,199 | 9,257,899 | 3,789,537 |
Allowances | (2,117,084) | (5,289) | (2,335,518) | (20,871) |
Net sales | 5,673,352 | 3,026,365 | 6,922,381 | 3,459,576 |
Net sales related party | - | 54,545 | - | 309,090 |
Total Net Sales | 5,673,352 | 3,080,910 | 6,922,381 | 3,768,666 |
Cost of sales | 2,134,662 | 523,821 | 2,625,670 | 751,944 |
| | | | |
Gross Profit | 3,538,689 | 2,557,089 | 4,296,711 | 3,016,722 |
| | | | |
Operating expenses | 5,939,343 | 937,123 | 7,484,275 | 2,624,768 |
Income (Loss) from operations | (2,400,645) | 1,619,966 | (3,187,564) | 391,954 |
Realized and Unrealized gain (loss) on marketable securities | 371,359 | - | (1,207,617) | - |
(Increase) decrease on contingent liability | (30,914,074) ) | - | (30,914,074) | - |
Gain (loss) on disposal of property and equipment | - | 200 | - | (69,311) |
Interest income (expense) | 18,086 | (246) | 62,119 | (505) |
Income (loss) before provision for income taxes | (32,925,274) | 1,619,920 | (35,247,136) | 322,138 |
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Benefit (Provision) for income taxes | 1,075,000 | 23,000 | 1,208,000 | 56,000 |
Net Income (Loss) | (31,850,274) | 1,642,920 | (34,039,136) | 378,138 |
Net Gain (Loss) attributable to noncontrolling interest | (58,536) | 238,523 | (137,685) | 106,669 |
| | | | |
Net Income (Loss) attributable to cbdMD, Inc. common shareholders | $(31,791,738) | $1,404,397 | $(33,901,451) | $271,469 |
| | | | |
Net Income (Loss) per share: | | | | |
Basic | $(3.13) | $0.17 | $(3.35) | $0.04 |
Diluted | $- | $0.17 | $- | $0.04 |
| | | | |
Weighted average number of shares Basic: | 10,160,947 | 8,025,576 | 10,107,144 | 7,385,294 |
Weighted average number of shares Diluted: | 10,160,947 | 8,040,666 | 10,107,144 | 7,406,113 |
See Notes to Condensed Consolidated Financial Statements
6
LEVEL BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2018 AND 2017
(unaudited)
| Nine Months Ended June 30, | Nine Months Ended June 30, |
| | |
| | |
Cash flows from operating activities: | | |
Net income (loss) | $943,390 | $(1,127,608) |
Adjustments to reconcile net income (loss) to net | | |
cash used by operating activities: | | |
Stock based compensation | 386,719 | 40,453 |
Restricted stock expense | 39,100 | 117,300 |
Amortization of debt discounts | - | 5,159 |
Issuance of stock / warrants for service | 478,002 | 592,666 |
Amortization of debt issue costs | - | 305,800 |
Depreciation and amortization | 169,788 | 42,151 |
Inventory impairment | 102,124 | - |
Loss on sale of property and equipment | 69,311 | 4,000 |
Other-than-temporary impairment on marketable securities | - | 175,000 |
Common stock issued as charitable contribution | - | 17,000 |
Debt conversion expense | - | 446,250 |
Marketable and Investment Other Securities | - | (1,562,000) |
Non-cash consideration received for services | (3,404,502) | - |
Changes in operating assets and liabilities: | | |
Accounts receivable | (45,402) | (154,745) |
Accounts receivable – related party | (637,675) | (114,000) |
Other accounts receivable | (1,204,003) | - |
Other accounts receivable – related party | 236,364 | - |
Note receivable | (450,000) | |
Note receivable – related party | 114,802 | - |
Inventory | 10,340 | (109,661) |
Prepaid expenses and other current assets | (980,952) | 67,434 |
Accounts payable and accrued expenses | (324,785) | (397,298) |
Accounts payable and accrued expenses – related party | (470,905) | (39,725) |
Interest Payable | - | 184,889 |
Deferred revenue | 121,916 | 47,333 |
Deferred tax liability | 6,000 | 42,250 |
Cash used by operating activities | (4,840,368) | (1,417,352) |
| | |
Cash flows from investing activities: | | |
Purchase of investment other securities | (300,000) | - |
Purchase of intangible assets | (360,000) | - |
Purchase of property and equipment | (2,465) | (15,018) |
Cash used by investing activities | (662,465) | (15,018) |
Cash flows from financing activities: | | |
Proceeds from issuance of common stock | 10,927,535 | 201,450 |
Proceeds from convertible note | - | 2,125,000 |
Distributions paid to members’ of EE1 | - | (59,551) |
Distribution income | - | 30,363 |
Debt issuance costs | - | (200,800) |
Repayment of line of credit | - | (300,000) |
Deferred issuance costs | (285,086) | - |
Cash provided by financing activities | 10,642,449 | 1,796,462 |
Net increase (decrease) in cash | 5,139,616 | 364,092 |
Cash and cash equivalents, beginning of period | 284,246 | 34,258 |
Cash and cash equivalents, end of period | $5,423,862 | $398,350 |
See Notes to Condensed Consolidated Financial Statements
7
LEVEL BRANDS,cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME (LOSS)
FOR THE NINETHREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2019 AND 2018 AND 2017
(unaudited) (continued)(Unaudited)
Supplemental Disclosures of Cash Flow Information: | | | | |
| | | | |
| | | | |
| | | | |
Net Income (Loss) | $(31,850,274) | $1,642,920 | $(34,039,136) | $378,138 |
Other Comprehensive Income: | | | | |
Net Unrealized Gain (Loss) on Marketable Securities, net of tax | - | (641,077) | - | (596,577) |
Comprehensive Income (Loss) | (31,850,274) | 1,001,843 | (34,039,136) | (218,439) |
| | | | |
Comprehensive Income (loss) attributable to non-controlling interest | (58,536) | 238,253 | (137,685) | 106,669 |
Comprehensive Income (Loss) attributable to cbdMD, Inc. common shareholders | $(31,791,738) | $763,590 | $(33,901,451) | $(325,108) |
| | | | |
| Nine Months ended June 30, | Nine Months Ended June 30, |
| | |
| | |
Cash Payments for: | | |
Interest expense | $505 | $5,210 |
| | |
Non-cash financial activities: | | |
| | |
Warrants issued to IPO selling agent | $171,600 | $- |
Equity investment exchange to be issued in the future | 160,000 | - |
Common stock issued to purchase membership interest – I’M1 | - | 971,667 |
Common stock issued to purchase membership interest – EE1 | - | 471,667 |
Common stock issued for services | - | 592,666 |
Warrants issued with convertible notes | - | 5,159 |
Noncontrolling interest transfer | - | 856,547 |
Equity issued to purchase membership interest in subsidiary | - | 242,000 |
Strike price adjustment on placement agent warrants | | 31,505 |
Common stock issued for warrant exercise | | 85,950 |
Fixed asset write off | - | 7,000 |
Common stock issued for conversion of Line of Credit | - | 773,177 |
Common stock issued for conversion of promissory notes | - | 2,252,500 |
See Notes to Condensed Consolidated Financial Statements
8
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2019 AND 2018
(unaudited)
LEVEL BRANDS, | Six Months Ended March 31, | Six Months Ended March 31, |
| | |
Cash flows from operating activities: | | |
Net loss | $(34,039,136) | $378,138 |
Adjustments to reconcile net loss to net | | |
cash used by operating activities: | | |
Stock based compensation | 163,148 | 31,066 |
Restricted stock expense | - | 39,100 |
Issuance of stock / warrants for service | 19,313 | 57,002 |
Inventory impairment | - | 102,124 |
Depreciation and amortization | 171,356 | 116,937 |
Gain on settlement of Note | (20,000) | - |
Increase/(Decrease) in contingent liability | 30,914,074 | - |
Realized and unrealized loss of marketable securities | 1,207,617 | - |
Loss on sale of property and equipment | - | 69,311 |
Non-cash consideration received for services | (470,000) | (2,654,503) |
Changes in operating assets and liabilities: | | |
Accounts receivable | 32,156 | 57,767 |
Accounts receivable – related party | 204,902 | 712,325 |
Other accounts receivable | (137,043) | (786,112) |
Other accounts receivable – related party | - | 90,910 |
Note receivable | (18,000) | - |
Note receivable – related party | 156,147 | 6,004 |
Merchant reserve | (199,907) | - |
Inventory | (1,194,186) | 449 |
Prepaid expenses and other current assets | 168,041 | (382,497) |
Marketable securities | 440,211 | - |
Accounts payable and accrued expenses | 43,076 | (371,255) |
Accounts payable and accrued expenses – related party | (393,016) | (1,042,805) |
Deferred revenue / customer deposits | (303,125) | 79,208 |
Deferred tax liability | (1,208,000) | (56,000) |
Cash used by operating activities | (4,462,372) | (3,552,831) |
| | |
Cash flows from investing activities: | | |
Net cash used for merger | (1,177,867) | - |
Purchase of investment other securities | - | (300,000) |
Purchase of intangible assets | (79,999) | (360,000) |
Purchase of property and equipment | (102,204) | (2,465) |
Cash used by investing activities | (1,360,070) | (662,465) |
| | |
Cash flows from financing activities: | | |
Proceeds from issuance of common stock | 6,356,997 | 10,927,535 |
Deferred issuance costs | (177,521) | (285,086) |
Cash provided by financing activities | 6,179,476 | 10,642,449 |
Net increase (decrease) in cash | 357,034 | 6,427,153 |
Cash and cash equivalents, beginning of period | 4,282,553 | 284,246 |
Cash and cash equivalents, end of period | $4,639,587 | $6,711,399 |
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2019 AND 2018
(unaudited) (continued)
Supplemental Disclosures of Cash Flow Information:
| Six Months ended March 31, | Six Months Ended March 31, |
| | |
| | |
Cash Payments for: | | |
Interest expense | $23,938 | $505 |
| | |
Non-cash financial activities: | | |
Warrants issued to secondary selling agent | $86,092 | $171,600 |
Stock received for prior period services, adjusted for other accounts receivable write down prior to receipt | $1,352,000 | $- |
Adoption of ASU 2016-01 | $2,512,539 | $- |
| | |
See Notes to Condensed Consolidated Financial Statements
10
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2019
| | | | | | |
| | | | | | | |
Balance, September 30, 2018 | 8,123,928 | 8,124 | 21,781,095 | (2,512,539) | (6,669,495) | 1,411,972 | 14,019,155 |
Issuance of common stock | 1,971,428 | 1,971 | 6,355,027 | - | - | - | 6,356,998 |
Issuance of options for share based compensation | - | - | 143,673 | - | - | - | 143,673 |
Issuance of stock costs | - | - | (205,569) | - | - | - | (205,569) |
Adoption of ASU 2016-01 | - | - | - | 2,512,539 | (2,512,539) | - | - |
Net loss | - | - | - | - | (2,109,715) | (79,149) | (2,188,864) |
Balance, December 31, 2018 | 10,095,356 | 10,095 | 28,074,224 | - | (11,291,749) | 1,332,823 | 18,125,391 |
Issuance of options for share based compensation | - | - | 19,475 | - | - | - | 19,475 |
Issuance of stock and warrants for services | 75,000 | 75 | 289,675 | - | - | - | 289,750 |
Net loss | - | - | - | - | (31,791,738) | (58,536) | (31,850,274) |
Balance, March 31, 2019 | 10,170,356 | 10,170 | 28,383,374 | - | (43,083,487) | 1,274,287 | (13,415,656) |
| | | | | | | |
See Notes to Condensed Consolidated Financial Statements
11
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2018
| | | | | | |
| | | | | | | |
Balance, September 30, 2017 | 5,792,261 | 5,792 | 10,463,480 | - | (6,257,421) | 937,063 | 5,148,914 |
Issuance of common stock | 2,000,000 | 2,000 | 9,971,114 | - | - | - | 9,973,114 |
Issuance of options for share based compensation | - | - | 17,114 | - | - | - | 17,114 |
Issuance of stock for deferred IPO costs | - | - | 171,600 | - | - | - | 171,600 |
Issuance of stock and warrants for services | 6,667 | 7 | 36,995 | - | - | - | 37,002 |
Issuance of restricted stock for share based compensation | - | | 39,100 | - | - | - | 39,100 |
Other Comprehensive income (loss) | - | - | - | 33,500 | - | - | 33,500 |
Net loss | - | - | - | - | (1,132,928) | (131,855) | (1,264,783) |
Balance, December 31, 2017 | 7,798,928 | 7,799 | 20,694,245 | 33,500 | (7,390,349) | 805,208 | 14,155,561 |
Issuance of common stock | - | - | - | - | - | - | - |
Issuance of options for share based compensation | - | - | 13,952 | - | - | - | 13,952 |
Issuance of stock and warrants for services | 235,000 | 235 | 19,765 | - | - | - | 20,000 |
Other Comprehensive income (loss) | - | - | - | (630,077) | - | - | (630,077) |
Net loss | - | - | - | - | 1,404,397 | 238,523 | 1,642,920 |
Balance, March 31, 2018 | 8,033,928 | 8,034 | 20,727,962 | (596,577) | (5,985,952) | 1,043,731 | 15,202,356 |
| | | | | | | |
See Notes to Condensed Consolidated Financial Statements
12
cbdMD , INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINESIX MONTHS ENDED JUNE 30,MARCH 31, 2019 AND 2018 AND 2017
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Level Brands,cbdMD, Inc. ("Level Brands",cbdMD ", "we", "us", “our”, "Parent Company” or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands, Inc. On April 22, 2019, following approval by our shareholders at the 2019 annual meeting held on April 19, 2019, we filed Articles of Amendment to our Articles of Incorporation changing the name of our company to “cbdMD, Inc.” effective May 1, 2019. We operate from our offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30.
The accompanying unaudited interim condensed consolidated financial statements of Level BrandscbdMD have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report filed with the SEC on Form 10-K for the year ended September 30, 2017.2018. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal year 20172018 as reported in the Form 10-K have been omitted.
In March 2015, the Company formed Beauty and Pin-Ups, LLC ("BPU"), a North Carolina limited liability company, and contributed $250,000 in exchange for our member interest. As of September 30, 2017,2018, we own 100% interest in BPU. BPU manufactures, marketsBPU’s initial business focus was to manufacture, market and sellssell an array of beauty and personal care products, including hair care and hair treatments, as well as beauty tools. The Company's products historically have been sold to the professional salon market, principally through distributors to professional salons in the North America and has expanded its focus to retailers, online segments and licensing opportunities. BPU no longer manufactures products and has focused on licensing agreements.
I’M1, LLC. (“I’M1”) was formed in California in September 2016. IM1 Holdings, LLC, a California limited liability company, (“IM1 Holdings”) was the initial member of I’M1. In January 2017, we acquired all of the Class A voting membership interests in I’M1 from IM1 Holdings in exchange for 583,000 shares of our common stock, which represents 51% of the interest in I’M1. IM1 Holdings continues to own the Class B non-voting membership interest of I’M1. I’M1 – Ireland Men One is a brand inspired by Kathy Ireland that focuses on providing millennial-inspired lifestyle products under the I’M1 brand. I’M1 has entered into an exclusive wholesale license agreement with kathy ireland® Worldwide in connection with the use of the intellectual property related to this brand.
Encore Endeavor 1, LLC (“EE1”) was formed in California in March 2016. EE1 Holdings, LLC, a California limited liability company, (“EE1 Holdings") was the initial member of EE1. In January 2017, we acquired all of the Class A voting membership interests in EE1 from EE1 Holdings in exchange for 283,000 shares of our common stock, which represents 51% of the interest in EE1. EE1 Holdings continues to own the Class B non-voting membership interests of EE1. EE1 is a brand management company and producer and marketer of multiple entertainment distribution platforms under the EE1 brand.
Level H&W, LLC (“Level H&W”) was formed in North Carolina in October 2017 and began operations in fiscal 2018; we own 100% interest in Level H&W. The Company signed an agreement with kathy ireland® Worldwide to retain exclusive rights to the intellectual property and other rights in connection with kathy ireland® Health & Wellness™ and its associated trademarks and tradenames. Level H&W focuses on establishing licensing arrangements under the kathy ireland® Health & Wellness™ brand. The agreement initially was a seven year agreement with a three year option to extend by the Company. The Company agreed to pay $840,000 over the license term of seven years, of which $480,000 was paid by January 1, 2018, and $120,000 iswas to be paid on January 1 of subsequent years until paid in full. The Company will pay kathy ireland® Worldwide 33 1/3% of net proceeds we receive under any sublicense agreements we may enter into for this intellectual property as royalties, with credit being applied for any payments made toward the $840,000.
In January 2018, the Company, amended its wholesale license agreement with kathy Ireland® Worldwide. The amendment accounted for the Company exercising its option on a three year extension and amending the payment terms related to this extension as follows: to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts due under the Agreement, $320,000 on the latter of January 1, 2019 or 30 days after the receipt by the Company of $5,000,000 in net proceeds from sublicense agreements signed under the health and wellness trademarks. In addition, royalty payments to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds. The Company capitalized the cost into
intangibles and is amortizing them over the term of the licensing agreement. In December 2018, the Company agreed to and paid the balance owed as final payment at a reduced price of $300,000.
On November 17, 2017, the Company completed an initial public offering (the “IPO”) of 2,000,000 shares of its common stock for aggregate gross proceeds of $12.0 million. The Company received approximately $10.9 million in net proceeds after deducting expenses and commissions. On October 2, 2018, the Company completed a secondary public offering of 1,971,428 shares of its common stock for aggregate gross proceeds of approximately $6.9 million. The Company received approximately $6.3 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses payable by us.
On December 20, 2018 the Company, and its newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, completed a two-step merger (the “Mergers”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). Upon completion of the Mergers, cbdMD LLC survived and operates the prior business of Cure Based Development. On April 10, 2019, cbdMD LLC was renamed to CBD Industries LLC (“CBDI”). As consideration for the Mergers, the Company has a contractual obligation, after approval by our shareholders, to issue 15,250,000 shares of our common stock to the members of Cure Based Development, of which 8,750,000 of the shares will vest over a five year period and are subject to a voting proxy agreement. CBDI produces and distributes various high-grade, premium cannibidiol oil (“CBD”) products under the cbdMD brand. CBD is a natural substance produced from the hemp plant and the products manufactured by CBDI are non pyschoactive as they do not contain tetrahydrocannibinol (THC).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries I’M1 and EE1 and wholly owned subsidiaries CBDI, BPU and Level H&W. All material intercompany transactions and balances have been eliminated in consolidation. The third party ownership of the Company’s subsidiaries is accounted for as non-controlling interest in the consolidated financial statements. Changes in the non-controlling interest are reported in the statement of shareholders’ equity (deficit).
Use of Estimates
The preparation of the Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”), and requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, trade support costs, certain assumptions related to the valuation of investments other securities, marketable securities, common stock, acquired intangible and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities.liabilities, contingent liability and, hence consideration for the Mergers is a material estimate. Actual results could differ from these estimates.
Cash and Cash Equivalents
For financial statements purposes, the Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents.
Accounts receivable and Accounts receivable other
Accounts receivable are stated at cost less an allowance for doubtful accounts, if applicable. Credit is extended to customers after an evaluation of the customer’s financial condition, and generally collateral is not required as a condition of credit extension. Management’s determination of the allowance for doubtful accounts is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of September 30, 2017, management determined an accounts receivable allowance of $50,000 was appropriate due to possible uncollectability. We did notMarch 31, 2019 we have an allowance for doubtful accounts of as of June$15,595, and had no allowance at September 30, 2018.
In addition, the Company may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services is common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivable as accounts receivable other, and use the value of the stock or other instrument upon invoicing to determine the value. Where an accounts receivable is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as
an asset on the balance sheet as either an investment marketable security (when the customer is a publicly traded entity) or as an investment other security (when the customer is a private entity).
Accounts receivable and accounts receivable other items that involve a related party are indicated as such on the face of the financial statements.
10Receivable and Merchant Reserve
The Company primarily sells its products through the internet and has an arrangement to process customer payments with third-party payment processors. The arrangement with the payment processor requires that the Company pays a fee of between 5.95% - 6.95% of the transaction amounts processed. Pursuant to this agreement, there is a waiting period between 4 -14 days prior to reimbursement to the Company, as well as a calculated reserve which the payment processor holds back. Fees and reserves can change periodically with notice from the processors. At March 31, 2019, the receivable from payment processors included approximately $343,230 for the waiting period amount and is recorded as accounts receivable in the accompanying consolidated balance sheet and $626,160 for the reserve amount for a total receivable of $969,390.
Marketable Securities
At the time of acquisition, a marketable security is designated as available-for-sale as the intent is to hold for a period of time before selling. Available-for-saleMarketable securities that are equity securities are carried at fair value on the consolidated balance sheets with changes in fair value recorded as an unrealized gain or (loss) in the accumulated other comprehensive income (loss) componentStatements of shareholders’ equityOperations in the period of the change in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) 320-10.change. Upon the disposition of an available-for-salea marketable security, the Company reclassifies therecords a realized gain or loss on the security from accumulated other comprehensive income (loss) to non-operating income (loss) on the Company’s consolidated statements of operations. On October 1, 2018, as a result of the adoption of ASU 2016-01 –Financial Instruments, the Company reclassified $2,512,539 of net unrealized losses on marketable securities, that were formerly classified as available-for-sale securities before the adoption of the new standard, from Accumulated Other Comprehensive Loss to Accumulated Deficit.
Investment Other Securities
For equity investments where the Company neither controls nor has significant influence over the investee and which are non-marketable, the investments are accounted for using the cost method of accounting in accordance with ASC 325-10. Under the cost method, dividends received from the investment are recorded as dividend income within non-operating income.
Other-than-Temporary Impairment
The Company’s management periodically assesses its marketable securities and investment other securities, which are held at cost less impairment, for any unrealized losses that may be other-than-temporary and require recognition of an impairment loss in the consolidated statement of operations. If the costcarrying value of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the length of time the security has been in a loss position, the extent to which the security’s market value is less than its cost,carrying value, the financial condition and prospects of the security’s issuer and the Company’s ability and intent to hold the security for a length of time sufficient to allow for recovery. If the impairment is considered other-than-temporary, an impairment charge is recorded in non-operating income in the consolidated statements of operations.
Inventory
Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, freight-in, and production fill and labor (which(portions of which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end.
Customer Deposits
Customer deposits consist of payments received in advance of revenue recognition. Revenue is recognized as revenue recognition criteria are met.
Property and Equipment
Property and equipment items are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to operating expense as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for show booths and equipment, three to four years for manufacturer’s molds and plates, three years for computer,computers, furniture and equipment, leasehold improvements, and three years for software. The cost and accumulated depreciation of property are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the consolidated statement of operations for the applicable period. Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstance indicate the carrying value of an asset may not be recoverable.
Fair value accounting
The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
When the Company records an investment in marketable securities the asset is valued at fair value. For investment other securities, it will value the asset using the cost method of accounting. Any changes in fair value for marketable securities during a given period will be recorded as aan unrealized gain or loss in other comprehensive income (loss), unless a decline is determined to be other-than-temporary.the Statement of Operations. For investment other securities we use the cost method and comparehold the securities at cost less impairment. The company periodically compares the fair value of the investment other security to cost in order to determine if there is an other-than-temporary impairment.impairment that should be recorded.
Intangible Assets
The Company's intangible assets consist of trademarks, goodwill, and other intellectual property, which are accounted for in accordance with ASC Topic 350, Intangibles – Goodwill and Other. The Company employs the non-amortization approach to account for purchased intangible assets having indefinite lives. Under the non-amortization approach, intangible assets having indefinite lives are not amortized into the results of operations, but instead are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. We perform an impairment analysis at August 1 annually on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. If a quantitative analysis is necessary, we would analyze various aspects including number of contracts acquired and retained as well as revenues from those contracts, associated with the intangible assets. In addition, intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred.
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated period of benefit. In accordance with ASC 360-10-35-21, finite lived intangibles are reviewed annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value.
In conjunction with any acquisitions, the Company refers to ASC-805 as amended by Accounting Standards Update (“ASU”) 2017-01 in determining if the Company is acquiring any inputs, processes or outputs and the impact that such factors would
have on the classification of the acquisition as a business combination or an asset purchase. Additionally, the Company refers to the aforementioned guidance in reviewing all potentialacquired assets and assumed liabilities for valuation in a business combination, including the determination of intangible asset values.
Contingent liability
A significant component of the purchase price consideration for the Company’s acquisition of CBDI includes a fixed number of future shares to be issued as well as a variable number of future shares to be issued based upon the post-acquisition entity reaching certain specified future revenue targets, as further described in Note 9. The Company made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination.
The Company recognizes both the fixed number of shares to be issued, and the variable number of shares to be potentially issued, as contingent liabilities on its Consolidated Balance Sheets. These contingent liabilities are recorded at fair value upon the acquisition date and are remeasured quarterly based on the reassessed fair value as of the end of that quarterly reporting period.
For the three months ending March 31, 2019, the contingent liabilities associated with the business combination were increased by $30,914,074 to reflect their reassessed fair values as of March 31, 2019. For the three months ended March 31, 2019, the Company made no material adjustments to the forecasted performance of the post-acquisition entity that would impact the estimated likelihood that the revenue targets disclosed in Note 9 would be met. The primary catalyst for the $30,914,074 increase in contingent liabilities is the change in the Company’s share price between December 31, 2018 and March 31, 2019. These increases or reductions to the contingent liabilities are reflected within Other Expenses on the Consolidated Statements of Operations.
Common stock
Level BrandsThe Company was a private company until November 2017 and as such there was no market for the shares of its common stock. Previously, we valued a share of common stock based on recent financing transactions that included the issuance of common stock to an unrelated party at a specified price. In the event, however, there had not been a recent and significant equity financing transaction, or the nature of the business had significantly changed subsequent to an equity financing, we used valuation techniques, which included discounted cash flow analysis, comparable company review, and consultation with third party valuation experts to assist in estimating the value of our common stock. On November 17, 2017, the Company completed its IPO, thus our stock has been valued by the market since that date.
Revenue Recognition
The Company's policyCompany adopted ASC 606,Revenue from Contracts with Customersusing the modified retrospective method beginning with our quarter ending December 31, 2018. The adoption of the new revenue standards as of October 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product, the services have been rendered, or the usage-based royalty has been earned. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to any of its revenue streams, no adjustment to retained earnings was required upon adoption.
Under the ASC 606, the Company recognizes revenues when its customer obtains control of promised goods or services, in relationan amount that reflects the consideration which it expects to product salesreceive in exchange for those goods. The Company recognizes revenues following the five step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Performance Obligations
A performance obligation is a promise in a contract to recognize revenue when persuasive evidence of an arrangement exists, shipping has occurred,transfer a distinct good or service to a customer. The Company has reviewed its various revenue streams for its existing contracts under the five-step approach. The Company has entered into various license agreements that provide revenues based on guarantee minimum royalty payments with additional royalty revenues based on a percentage of defined sales. Guaranteed minimum royalty payments (fixed revenue) are recognized on a straight-line basis over the term of the contract, as defined in each license agreement. Earned royalties and earned royalties in excess of the fixed revenue (variable revenue) are recognized as income during the period corresponding to the licensee’s sales. Earned royalties in excess of fixed revenue are only recognized when the Company is reasonably certain that the guaranteed minimums payments for the period will be exceeded.
The below table summarizes amounts related to future performance obligations under fixed contractual arrangements as of March 31, 2019:
| | |
| | |
Future performance obligations | $0 | $0 |
Allocation of transaction price
At times, the Company enters into contracts with customers wherein there are multiple elements that may have been satisfied,disparate revenue recognition patterns. In such instances, the salesCompany must allocate the total transaction price to these various elements. This is fixedachieved by estimating the standalone selling price of each element, which is the price at which we sell a promised good or determinableservice separately to a customer.
In circumstances where we have not historically sold relevant products or services on a standalone basis, the Company utilizes the most situationally appropriate method of estimating standalone selling price. These methods include (i) an adjusted market assessment approach, wherein we refer to prices from our competitors for similar goods or serves and collection is probable. adjust those prices as necessary to reflect our typical costs and margins, (ii) an expected cost plus margin approach, wherein we forecast the costs
that we will incur in satisfying the identified performance obligation and adding an appropriate margin to such costs, and (iii) a residual approach, wherein we adjust the total transaction price to remove all observable standalone selling prices of other goods or services included in the contract and allocate the entirety of the remaining contract amount to the remaining obligation.
Revenue recognition
The Company records revenue from the sale of its products when risk of loss and title to the product are transferred to the customer, which is upon shipping. Net sales are comprised of gross revenues less expected product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions and coupons.promotions. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. Although currently the Company does not have a formal return policy from time to timeand historically our returns have been immaterial, in connection with the Company will allow customers to Mergers with Cure Based Development we are evaluating implementation of a formal refund/return certain products. A business decision related to customer returns is made by the Company and is performed on a case-by-case basis. We record returns as a reduction in sales and based on whether we dispose of the returned product, adjust inventory and record expense as appropriate. There were no allowances for sales returns at the three and nine months ended June 30, 2018.policy.
The Company also enters into various license agreements that provide revenues based on royalties as a percentage of sales and advertising/marketing fees. The contracts can also have a minimum royalty, with which this and the advertising/marketing revenue is recognized on a straight-line basis over the term of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding to the licensee’s sales, as are all royalties that do not have a minimum royalty. Payments received as consideration of the grant of a license are recognized ratably as revenue over the term of the license agreement and are reflected on the Company’s consolidated balance sheets as deferred revenue at the time payment is received and recognized ratably as revenue over the term of the license agreement. Similarly, advanced royalty payments are recognized ratably over the period indicated by the terms of the license and are reflected in the Company’s consolidated balance sheet in deferred revenue at the time the payment is received. Revenue is not recognized unless collectability is reasonably assured. If licensing arrangements are terminated prior to the original licensing period, we will recognize revenue for any contractual termination fees, unless such amounts are deemed non-recoverable. Licensing for trademarks are considered symbolic licenses, which contain the characteristics of a right-to-access license since the customer is simultaneously receiving the Intellectual Property and benefiting from it throughout the license period. As such, the Company primarily records revenue from licenses on a straight-line basis over the license period as the performance obligation is satisfied over time.
In regard to sales for services provided, the Company records revenue when persuasive evidence of any agreement exists,the customer has accepted services have been rendered, and collectability is reasonably assured.the Company has a right to payment. Based on the contracted services, revenue is recognized when the Company invoices customers for completed services at agreed upon rates or revenue is recognized over a fixed period of time during which the service is performed.
Disaggregated Revenue
Our segment reporting categorizes Company activity into the following broad transaction types: product sales, licensing arrangements and advisory services. We believe that these segment categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors. See Note 15 – Segment Information, for disaggregated presentation of revenue.
Contract Balances
Contract assets represent unbilled receivables and are presented within accounts receivable, net on the condensed consolidated balance sheets. Contract liabilities represent unearned revenues and are presented as deferred revenue or customer deposits on the condensed consolidated balance sheets.
The below table summarize the net change in contract assets and contract liabilities from October 1, 2018 to March 31, 2019:
| | | | |
Balance at September 30, 2018 | $37,500 | - | $115,625 | $153,125 |
Billed during three months ended December 31, 2018 | 75,000 | 265,000 | - | 340,000 |
Earned during three months ended December 31, 2018 | (68,750) | - | (115,625) | (184,375) |
Balance at December 31, 2018 | $43,750 | $265,000 | - | $308,750 |
Amount returned during three months ended March 31, 2019 | | (175,000) | | (175,000) |
Billed during three months ended March 31, 2019 | - | - | 10,000 | 10,000 |
Earned during three months ended March 31, 2019 | (18,750) | - | (1,667) | (20,417) |
Balance at March 31, 2019 | $25,000 | $90,000 | $8,333 | $123,333 |
Cost of Sales
Our cost of sales includes costs associated with distribution, external fill and labor expense, components, manufacturing overhead, and outbound freight for our professional products divisions, and includes labor, third-party service providers, and amortization expense related to intellectual property for our licensing and entertainment divisions. In our professional products division, cost of sales also includes the cost of refurbishing products returned by customers that will be offered for resale and the cost of inventory write-downs associated with adjustments of held inventories to their net realizable value. These costsexpenses are reflected in the Company’s consolidated statements of operations when the product is sold and net sales revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their net realizable value.
Advertising Costs
The Company expenses all costs of advertising and related marketing and promotional costs as incurred. The Company incurred approximately $443,000$1,559,000 and $155,000$248,000 in advertising and related marketing and promotional costs included in operating expenses during the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. The Company incurred approximately $1,036,000$1,775,000 and $297,000$581,000 in advertising and related marketing and promotional costs included in operating expenses during the ninesix months ended June 30,March 31, 2019 and 2018, and 2017, respectively.
Shipping and Handling Fees and Costs
All fees billed to customers for shipping and handling are classified as a component of sales. All costs associated with shipping and handling are classified as a component of cost of goods sold.
Income Taxes
The Parent Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. Prior to April 2017, BPU was a multi-member limited liability company that was treated as a partnership for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of BPU was included in the tax return of the Parent Company. Beginning in April 2017, the Parent Company acquired the remaining interests in BPU. As a result of the acquisition, BPU became a disregarded entity for tax purposes and its entire share of taxable income or loss was included in the tax return of the Parent Company. CBDI and Level H&W is aare wholly owned subsidiarysubsidiaries and is aare disregarded entityentities for tax purposes and itstheir entire share of taxable income or loss is included in the tax return of the Parent Company. IM1 and EE1 are multi-member limited liability companies that are treated as partnerships for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of IM1 and EE1 are included in the tax return of the Parent Company.
The Parent Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of the FASB ASC 740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Parent Company uses the inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
US GAAP requires management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain tax position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company, and has concluded that as of June 30,March 31, 2019 and 2018, and 2017, there were no uncertain tax positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements.
Concentrations
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and securities.
The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. The Company had a $5,055,085$741,300 uninsured balance at June 30, 2018March 31, 2019 and a $4,728$0 uninsured balance at September 30, 2017.2018. Funds which are not subject to coverage or loss under FDIC were $3,355,000 and $4,003,003 at March 31, 2019 and September 30, 2018, respectively.
Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company did not have any customers that represented a significant amount of our sales for the three and six months ended March 31, 2019, respectively. The Company had sales to three customersone customer that collectivelyindividually represented approximately 89% and 80%73% of total net sales for the three and ninesix months ended June 30,March 31, 2018, respectively. The aggregate accounts receivable of such customercustomers represented approximately 83%73% of the Company’s total accounts receivable and a long term note receivable at June 30,March 31, 2018. The Company had two and four customers, respectively, whose revenue collectively represented approximately 80% and 81% of the Company’s net sales for the three and nine months ended June 30, 2017, respectively.
Debt Issuance Costs
Debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. Amortization of debt issuance costs are included as a component of interest expense in accordance with ASU 2015-03. All debt obligations were satisfied in fiscal 2017 and all amortization costs had been recognized in interest expense in fiscal 2017 (see Notes 7 and 8).
Stock-Based Compensation
We account for our stock compensation under the ASC 718-10-30, “CompensationCompensation - Stock Compensation” Compensationusing the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which
an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments.
We use the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. Under ASU 2016-09 which amends ASC 718, which became effective October 1, 2017, we elected to change our accounting principle to recognize forfeitures when they occur. This change had no impact on beginning retained earnings as there had been no forfeitures estimated or incurred in prior periods.
Net Income (Loss) Per Share
The Company uses ASC 260-10, “EarningsEarnings Per Share” Sharefor calculating the basic and diluted income (loss) per share. The Company computes basic income (loss) per share by dividing net income (loss) and net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.
At the three and ninesix months ended June 30, 2017, 697,476March 31, 2019, 833,255 potential shares were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.
Deferred IPO costs
In following the guidance under ASC 340-10-S99-1, IPO costs directly attributable to an offering of equity securities were deferred and charged against the gross proceeds of the offering as a reduction of additional paid-in capital during the three months ended December 31, 2017. These costs included legal fees related to the registration drafting and counsel, independent audit costs directly related to the registration and offering, SEC filing and print related costs, exchange listing costs, and IPO roadshow related costs.
New Accounting Standards
In May 2014, August 2015 and May 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, and ASU 2015-14 Revenue from Contracts with Customers, Deferral of the Effective Date, respectively, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance under US GAAP, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2016. These ASUs may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. Level Brands will adopt this standard inThe new revenue standards became effective for the first quarterCompany on October 1, 2018 and were adopted using the modified retrospective method. The adoption of fiscal 2019 retrospectivelythe new revenue standards as of October 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product, the services have been rendered, or the royalty has been received. As the Company did not identify any accounting changes that impacted the amount of reported revenues with a cumulativerespect to its product revenues, no adjustment to retained earnings. The Company in in process of reviewing all contracts to determine if there is any impact in implementing this guidance on its consolidated financial position, results of operations and liquidity.earnings was required upon adoption.
In February 2016, the FASB issued ASU 2016-02, Leases. The purpose of ASU 2016-02 is to establish the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. The Company does have a 3 year lease for a manufacturing facility and is assessing the impact if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In August 2016,2018, the FASB issued ASU 2016-15,No. 2018-13, Statement of Cash FlowsFair Value Measurement (Topic 230), Classification of Certain Cash Receipts820). The ASU modifies, removes, and Cash Payments.adds several disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments in this update provided guidance on eight specific cash flow issues. This update is to provide specific guidance on each of the eight issues, thereby reducing the diversity in practice in how certain transactions areclassified in the statement of cash flows. ASU 2016-152018-13 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In January 2017, the FASB issued ASU 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effectiveall entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is evaluating the effect ASU 2018-13 will have on its consolidated financial statements and disclosures and has not yet determined the effect of the standard on its ongoing financial reporting at this time.
NOTE 2 – ACQUISITIONS
In March 2015 Level Brands formed BPU, aOn December 20, 2018 (the “Closing”), the Company, and its newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, both North Carolina limited liability companies, completed a two-step merger (the “Merger Agreement”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). The Merger Agreement provided that AcqCo LLC merge with and contributed $250,000 in exchange for its member interest. In April 2015 BPU entered into a Contribution AgreementCure Based Development with Beauty & Pinups, Inc., a New York corporation ("BPUNY"Cure Based Development as the surviving entity (the “Merger”), and two members. Underimmediately thereafter Cure Based Development merged with and into cbdMD LLC with cbdMD LLC as the termssurviving entity (the “Secondary Merger” and collectively with the Merger, the “Mergers”). cbdMD LLC was renamed on April 10, 2019 to CBD Industries LLC and has continued as a wholly-owned subsidiary of the Contribution Agreement, BPUNYCompany and its founder contributedmaintains the business and certain assets, includingoperations of Cure Based Development pre-closing. As consideration for the trademark “Beauty & Pin Ups” and its variants, certain other intellectual property and certain inventoryMerger, the Company has a contractual obligation, after approval by our shareholders, to BPU in exchange for a (i) 22% membership interest for two members, and (ii) $150,000 in cash. At closing we assumed $277,500 of BPUNY's accounts payable to its product vendor, which bore interest at 6% annually. The payable was paid off in April 2016. The fair value of the noncontrolling membership interest issued was based on the value of the initial contribution of $250,000 made by Level Brands. The total consideration paid was allocated to the net assets acquired based on relative fair values of those net assets as of the transaction date, in accordance with the Fair Value Measurement topic of the FASB ASC 820. The fair value is comprised of the cash, accounts payable acquired, non-controlling interest, intangibles, and a minimal amount of inventory, all in aggregate valued at $486,760.
I’M1 was formed in California in September 2016. IM1 Holdings was the initial member of IM'1. In January 2017, we acquired all of the Class A voting membership interests in I’M1 from IM1 Holdings in exchange for 583,000issue 15,250,000 shares of our common stock to the members of Cure Based Development, of which represents 51%8,750,000 of the interest in I’M1.shares will vest over a five year period and are subject to a voting proxy agreement. The shares were valued by the Company based upon assumptions and other information provided by management and used three approaches available when valuing a closely held business interest: the cost approach, the income approach and the market approach. Consequently, the market approach was deemed most appropriate, as it considers values established by non-controlling buyers and sellers of interests in the Company as evidenced by implied pricing in rounds of financing. In addition, given the limited data and outlook, the backsolve method was applied to assign values to the common equity, options and warrants after giving consideration to the preference of the convertible debt holders. The valuation determined the price per share of $0.85 which put the value of the 583,000 shares at $495,550. IM1 Holdings continues to own the Class B non-voting membership interest of I’M1. We accounted for the membership acquired by allocating the purchase price to the tradename and intellectual property valued at $971,667.
EE1 was formed in California in March 2016. EE1 Holdings was the initial member of EE1 Holdings. In January 2017, we acquired all of the Class A voting membership interests in EE1 from EE1 Holdings in exchange for 283,000Merger Agreement also provides that an additional 15,250,000 shares of our common stock which represents 51%can be issued upon the satisfaction of aggregate net revenue criteria by CBDI, within 60 months following the Closing. The net revenue criteria are: $20.0, $40.0, $80.0 and $160.0 million, in aggregate $300.0 million (See Note 9 for more information).
As discussed in Note 17, the initial 15,250,000 shares were approved by our shareholders to be issued as of April 19, 2019.
The Company owns 100% of the equity interest of CBDI. The valuation and purchase price allocation for the Mergers remains preliminary and will be finalized by September 30, 2019.
During the three months ended March 31, 2019, the Company identified equipment valued at $114,275 that was improperly classified in EE1. We used the same valuationinitial purchase price allocation. The purchase price allocation was adjusted by increasing Property and equipment, net and reducing Goodwill by this amount.
The following table presents the preliminary purchase price allocation:
Consideration | $74,353,483 |
| |
Assets acquired: | |
Cash and cash equivalents | $1,822,331 |
Accounts receivable | 850,921 |
Inventory | 1,054,926 |
Other current assets | 38,745 |
Property and equipment, net | 723,223 |
Intangible assets | 21,585,000 |
Goodwill | 55,144,269 |
Total assets acquired | 81,219,415 |
| |
Liabilities assumed: | |
Accounts payable | 257,081 |
Notes payable – related party | 764,300 |
Customer deposits - related party | 265,000 |
Accrued expenses | 471,551 |
Deferred tax liability | 5,108,000 |
Total Liabilities assumed | 6,865,932 |
| |
Net Assets Acquired | $74,353,483 |
The goodwill generated from this transaction can be attributed to the benefits the Company expects to realize from the growth strategies the acquired Company of $0.85 per share which puthad developed and the value of the 283,000 shares at $240,550. EE1 Holdings continues to own the Class B non-voting membership interests of EE1. We accounted for the membership acquired by allocatingentry into an emerging market with high growth potential. See Note 9 regarding contingent liability.
In connection with the purchase price allocation, the Company recorded a deferred tax liability of approximately $5,108,000, with a corresponding increase to goodwill, for the tax effect of the acquired intangible assets from Cure Base Development. This liability was recorded as there will be no future tax deductions related to the tradenameacquired intangibles, and intellectual property valued at $471,667.we have identified these as indefinite-lived intangible assets.
The Company also acquired estimated net operating loss carryforwards of approximately $1,996,000, Under Internal Revenue Code (IRC) Section 382, the use of net operating loss (“NOL”) carryforwards may be limited if a change in ownership of a company occurs. The Company will perform an analysis to determine if a change of ownership under IRC Section 382 had occurred and if so, determine the expiration and limitations of use of the NOLs.
NOTE 3 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES
The Company may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services is common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivable as accounts receivable other, and use the value of the stock or other instrument upon invoicing to determine the value. If there is insufficient data to support the valuation of the security directly, the company will value it, and the underlying revenue, using the estimated fair value of the services provided. Where an accounts receivable is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as an asset on the balance sheet as either an investment marketable security (when the customer is a public entity) or as an investment other security (when the customer is a private entity).
As of April 2017, the Company received 2,500,000 shares of common stock, of an OTC-quoted company under the terms of its agreement for services to the OTC-quoted company, which was valued at $650,000 based on the trading price on the OTC Markets on the day of issuance, which was $0.26 per share. The shares were restricted as indicated under Securities Act of 1933 and may not be resold without registration under the Securities Act of 1933 or an exemption therefrom. The Company determined that this common stock was classified as Level 1 for fair value measurement purposes as the stock was actively traded on an exchange.
As of June 30, 2017, the trading price on the OTC Markets was $0.03 and the Company had exchanged the 2,500,000 shares of common stock with the issuer for 65 shares of preferred stock. The 65 shares of preferred stock issued were each convertible using the lesser of either $0.26 per share or the 30 day trading average, that would provide a number of shares equal to the value of $10,000 per share. The Company classified the preferred stock as Level 3 for fair value measurement purposes as there were no observable inputs. The preferred shares also contained a put option for the holder for the stated value per share. The Company determined that the value of the preferred shares was $475,000, which was an approximation of fair market value. On July 31, 2017 the Company sold the preferred shares to a related party for $475,000; $200,000 in cash and a short term note receivable for $275,000 due July 31, 2018, which had a balance of $161,573 at June 30, 2018 and was subsequently amended with a payoff date of December 31, 2018. As a result, the Company recorded an other-than-temporary impairment on securities for the year ended September 30, 2017 of $175,000 in the consolidated statement of operations.
On June 23, 2017, I’M1 and EE1 in aggregate exercised a warrant for 1,600,000 shares of common stock for services delivered to a customer and accounted for this in Investment other securities. The common stock was issued to the Company’s subsidiaries I’M1 and EE1. The customer is a private entity and the stock was valued at $912,000, which was based on its recent financing in June 2017 at $0.57 per share. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used the fair value of the services provided, utilizing an analysis of vendor specific objective evidence of its selling price. In August 2017, each of I’M1 and EE1 distributed the shares to its majority owner, Level Brands, and also distributed shares valued at $223,440 to its non-controlling interests. In August 2017, the Company also provided referral services for kathy Ireland® Worldwide and this customer. As compensation the Company received an additional 200,000 shares of common stock valued at $114,000 using the pricing described above. The Company assessed the common stockinvestment and determined there was not an impairment for the period ended June 30, 2018.March 31, 2019.
On September 19, 2017, I’M1 and EE1 in aggregate exercised a warrant for 56,552 shares of common stock for services delivered to a customer and accounted for this in Investment other securities. The common stock was issued to the Company’s subsidiaries I’M1 and EE1. The customer is a private entity and the stock was valued at $56,552, which was based on all 2017 financing transactions of the customer set at $1.00 per share, with the most recent third party transaction in August 2017. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used factors including financial projections provided by the issuer and conversations with the issuer management regarding the Company’s recent results and future plans and the Company’s financing transactions over the past twelve months. The Company assessed the common stockinvestment and determined there was not an impairment for the period ended June 30, 2018.March 31, 2019.
In November 2017, the Company completed services in relation to an agreement with SG Blocks, Inc. (NASDAQ: SGBX). As payment for these services, SG Blocks issued 50,000 shares of its common stock to Level Brands. The customer is a publicly traded entity and the stock was valued based on the trading price at the day the services were determined delivered, which was $5.09 per share for an aggregate value of $254,500. The Company determined that this common stock was classified as Level 1 for fair value measurement purposes as the stock was actively traded on an exchange. The common stock isFrom November 7, 2018 thru December 13, 2018, the Company sold the 50,000 shares held and recorded a realized loss on marketable securities of $25,673 as available for sale, and at Marchof December 31, 2018 and June 30, 2018 respectively,in the shares were $4.61 and $5.20 per share, and we have recorded $29,500 and $5,500 as other comprehensive income (loss) on the Company consolidated financial statements for the three and nine months ended June 30, 2018.statement of operations. The Company assessed the common stock and determined there was not an indication of an other-than-temporary impairment.no longer has this equity position.
In December 2017, the Company completed services per an advisory services agreement with Kure Corp, formerly a related party. As payment for these services, Kure Corp issued 400,000800,000 shares of its stock to Level Brands. The customer was a private entity and the stock was valued at $200,000,$400,000, which was based on financing activities by Kure Corp in September 2017 in which shares were valued at $0.50 per share. In addition, in December 2017, the Company engaged and completed advisory services in relation to an additional agreement with Kure Corp, for services related to their “vape-pod” strategy. As payment for these services, Kure Corp issued an additional 400,000 shares of its stock to Level Brands which the Company received in January 2018. These shares were also valued at $200,000. The Company had classified this common stock, cumulative value
of $400,000, as Level 3 for fair value measurement purposes as there were no observable inputs. In valuing the stock the Company used factors including information provided by the issuer regarding their recent results and future plans as well as their most recent financing transactions. On April 30, 2018, Kure Corp. merged with Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company. In theDetails can be reviewed in our Form 10-K previously filed. As a result of this merger agreement, each share of Kure was valued at $1.00 as the initial value and is to be exchanged for shares of Isodiol in three issuances as follows: 1) 30% of the initial value issued on May 1, 2018, the balance of shares issued based on earn out goals as 2) 50% of the initial value to be issued on January 31, 2019 on a prorata basis based on sales and using the prior 10 day volume weighted average price of Isodiol shares and 3) 20% of the initial value to be issued on January 31, 2020 on a prorata basis based on sales and using the prior 10 day volume weighted average price of Isodiol shares. We recordedwe received the first issuance of 380,952 shares from Isodiol and valued them based on athe trading price on April 30, 2018 of $0.63 per share valued at $240,000 as a Level 1 for fair value measurement purposes as the stock is actively traded on an exchange.which totaled $240,000. We also removed the value of the Kure equity of $400,000 from our Level 3 investments as part of the exchange described above. As the full value of the Kure equity will not be received until the future issuances based on the above earn out goals, we have recorded an accounts receivable other of $160,000 as of June 30,December 31, 2018. On March 31, 2019, Isodiol spun off Kure to its original shareholders by issuing back all original Kure stock. As a result of the spin off, the Company will receive 800,000 shares of Kure stock valued at $160,000 and as Kure is private, the shares will be treated as a Level 3 stock and will be accounted for against the $160,000 accounts receivable other. The Company has assesseddetermined that the other accounts receivable and determined there is no indication that we will not receive the full amount. The common stock is held as available for sale, and at June 30, 2018, the800,000 shares were $0.36 per share, and we recorded $(102,857) as other comprehensive income (loss) on the Company consolidated financial statements for the three and nine months ended June 30, 2018.have a fair market value over $160,000. The Company alsohas assessed the common stock and determined there was not an indication of an other-than-temporary impairment.
impairment at March 31, 2019.
On December 21, 2017, the Company purchased 300 shares of preferred stock in a private offering from a currentprior customer for $300,000. The preferred shares are convertible into common stock at a 20% discount of a defined subsequent financing, or an IPO offering of a minimum $15 million, or at a company valuation of $45 million whichever is the least. The customer is a private entity. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used the value paid, which was the price offered to all third party investors. As of June 30, 2018,March 31, 2019, the Company has determined there is no impairment on the value of the shares of stock.
On December 30, 2017 Level Brandsthe Company entered into an AgreementanAgreement with Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company which is a developer of pharmaceutical grade phytochemical compounds and a manufacturer and developer of phytoceutical consumer products. The agreement required the Company to create a global branding and marketing campaign, which includes a joint strategy to develop Isodiol’s brand and products, an influencer program, and a social and traditional media strategy. As payment for these services, Isodiol agreed to pay $2,000,000 and issued 1,679,321the Company has received 1,226,435 shares of itsIsodiol common stock to Level Brands, based on the trading price on the daybetween December 31, 2017 and January 2019. The Company also received 38,095 shares of the agreement, which was $1.1909 per share. These shares were issued on January 22, 2018. In addition,Isodiol stock upon Isodiol’s acquisition of Kure Corp, giving the Company will provide ongoing quarterly supporta total of 1,264,530 shares. During the campaign which includes two branded videos each quarter, Ms. Ireland’s direct involvement in meetings or conferences once each quarter, and ongoing social media support by Ms. Ireland and Level Brands, all the services valued at $750,000 per quarter. This amount will be paid through issuancethree months ended March 31, 2019 we sold 110,636 shares of Isodiol stock and the numberrecorded a realized loss of $185,834. As of March 31, 2019 we have 1,153,894 shares issued will be determined based on the trading value of Isodiol stock on the last day of each quarter. Isodiol made the $750,000 payment for quarterly services forstock. At March 31, 2018 through2019 the issuance of shares of common stock. The common stock is held as available for sale, and at March 31, 2018 and June 30, 2018, theIsodiol shares were $0.85 and $0.36valued at $1.19 per share, and we recorded $(1,253,370)$557,193 and $(1,825,947)$(996,110) as other comprehensive incomeunrealized gain (loss) on the CompanyCompany’s consolidated financial statements for the three and ninesix months ended March 31, 2019, respectively. This investment is accounted for as a cost method investment.
On June 30, 2018. 26, 2018 Level Brands entered into an Agreement with Boston Therapeutics, Inc. (OTC: BTHE), a pharmaceutical company focused on the development, manufacturing and commercialization of novel compounds to address unmet medical needs in diabetes.The agreement involved a licensing agreement and required the Company assessedto create IP for a branding / marketing campaign.As payment for these services, Boston Therapeutics agreed to pay $850,000, of which $450,000 was issued as a note due no later than December 31, 2019 and $400,000 to be paid thru the issuance of BTI common stock and based on conversations with the company regarding its recent acquisitions, position intrading price at the CBD market, current financing events,agreement date ($0.075). As the stock has not been issued, we have recorded an unrealized gain (loss) of $53,333 and overall strategy, determined there was not an indication($186,667) for the three and six month periods ended March 31, 2019, respectively based on a trading price of an other-than-temporary impairment.$0.04 at March 31, 2019.
The table below summarizes the assets valued at fair value as of June 30, 2018:March 31, 2019:
| In Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value at June 30, 2018 | In Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value at March 31, 2019 |
| | |
Marketable securities | $1,321,196 | - | $- | $1,321,196 | $1,373,133 | - | $- | $1,373,133 |
Investment other securities | - | $1,159,112 | - | $1,159,112 |
| | |
| | | | |
Balance at September 30, 2018 | $1,050,961 | $- | $1,159,112 | $2,210,073 |
Sale of equities | $(200,000) | $- | $- | $(200,000) |
Change in value of equities | $(132,303) | $- | $- | $(132,303) |
Balance at December 31, 2018 | $718,658 | $- | $1,159,112 | $1,877,770 |
Sale of equities | $(103,998) | $- | $- | $(103,998) |
Receipt of equity investment upon completion of services | $470,000 | $- | $- | $470,000 |
Change in value of equities | $288,473 | $- | $- | $288,473 |
Balance at March 31, 2019 | $1,373,133 | $- | $1,159,112 | $2,532,245 |
| | | | |
Balance at September 30, 2017 | $- | $- | $859,112 | $859,112 |
Receipt of equity investment upon completion of contract | $254,500 | $- | $- | $254,500 |
Receipt of equity investment upon completion of contract | $- | $- | $200,000 | $200,000 |
Purchase of preferred shares, convertible into common stock | $- | $- | $300,000 | $300,000 |
Change in value of equity, other comprehensive income | $44,500 | $- | $- | $44,500 |
Balance at December 31, 2017 | $299,000 | $- | $1,359,112 | $1,658,112 |
Receipt of equity investment upon completion of services | $- | $- | $200,000 | $200,000 |
Receipt of equity investment upon completion of services | $2,000,000 | $- | $- | $2,000,000 |
Change in value of equity, other comprehensive income | $(641,077) | $- | $- | $(641,077) |
Balance at March 31, 2018 | $1,657,923 | $- | $1,559,112 | $3,217,035 |
Receipt of equity investment upon completion of services | $750,000 | $- | $- | $750,000 |
Exchange of equity via owner merger into public company | $240,000 | $- | $(400,000) | $(160,000) |
Change in value of equity, other comprehensive income | $(1,326,727) | $- | $- | $(1,326,727) |
Balance at June 30, 2018 | $1,321,196 | $- | $1,159,112 | $2,480,308 |
NOTE 4 – INVENTORY
Inventory at June 30, 2018March 31, 2019 and September 30, 20172018 consists of the following:
| | | | |
| | | | |
Finished goods | $265,555 | $375,459 | $1,062,562 | $18,531 |
Inventory components | 210,178 | 212,738 | 1,002,903 | 104,692 |
Inventory prepaid | | 306,870 | - |
Total | $475,733 | $588,197 | $2,372,335 | $123,223 |
InAt March 31, 2019, the nine monthsCompany determined that inventory related to BPU was impaired by approximately $139,217, as the BPU inventory balance was adjusted to zero as we no longer manufacture or intend to sell BPU products. During the year ended JuneSeptember 30, 2018, the Company determined that inventory was impaired by approximately $102,000. During the year ended September 30, 2017, the Company determined that inventory was impaired by approximately $67,000.$262,000. Impairment charges were recorded within operating expenses for the respective periods.
NOTE 5 – PROPERTY AND EQUIPMENT
Major classes of property and equipment at June 30, 2018March 31, 2019 and September 30, 20172018 consist of the following:
| | | | |
| | | | |
Computers and equipment | $39,926 | $37,261 | |
Computers, furniture and equipment | | $39,926 | $59,770 |
Show booth and equipment | 49,123 | 171,986 | - | 49,123 |
Manufacturers’ molds and plates | 34,200 | |
Manufacturing equipment | | 659,771 | - |
Leasehold improvements | | 175,293 | - |
Automobiles | | 24,893 | - |
Manufactures’ molds and plates | | - | 34,200 |
| 123,249 | 243,447 | 899,883 | 143,093 |
Less accumulated depreciation | (84,126) | (107,971) | (82,470) | (89,613) |
Net property and equipment | $39,123 | $135,476 | $817,413 | $53,480 |
Depreciation expense related to property and equipment was $8,443$50,951 and $14,520$8,558 for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. Depreciation expense related to property and equipment was $30,757$61,693 and $42,151$22,314 for the ninesix months ended June 30,March 31, 2019 and 2018, and 2017, respectively. During the ninethree months ended June 30,December 31, 2017 we recorded a one-time loss of $69,311 on the disposal of a show booth that is no longer in use.
NOTE 6 – INTANGIBLE ASSETS
On April 13, 2015, BPU acquired from BPUNY certain assets, including the trademark "Beauty & Pin Ups" and its variants and certain other intellectual property and assumed $277,500 of BPUNY's accounts payable to its product vendor, which was paid off in April 2016. We continue to transition this business by exploring retail sales channels as we are in test cycles with two large retailers and in discussion with others, are expanding our online sales channel and have engaged licensing opportunities with our first two licenses under BPU, and based on this activity the company has determined that it is not more likely than not that these assets are impaired.
On January 6, 2017, the Company acquired 51% ownership in I’M1 from I’M1 Holdings. I’M1’s assets include the trademark "I’M1” and its variants and certain other intellectual property. Specifically, a licensing agreement with kathy ireland® Worldwide and an advisory agreement for services with kathy ireland® Worldwide. The licensing agreement provides the rights to use of the tradename for business and licensing purposes, this is the baseline of the business and will be required as long as the business is operating. Our capability for renewals of these agreements are extremely likely as the agreements are with a related party. We also believe the existence of this agreement does not have limits on the time it will contribute to the generation of cash flows for I’M1 and therefore we have identified these as indefinite-lived intangible assets.
On January 6, 2017, the Company acquired 51% ownership in EE1 from EE1 Holdings. EE1’s assets include the trademark "EE1” and its variants and certain other intellectual property. Specifically, a production deal agreement with BMG Rights Management US and an advisory agreement for services with kathy ireland® Worldwide. We believe the production deal agreement and the advisory agreement do not have limits on the time they will contribute to the generation of cash flows for EE1 and therefore we have identified these as indefinite-lived intangible assets.
On September 8, 2017, the Company entered into a seven year wholesale license agreement with Andre Carthen and issued 45,500 shares of common stock, valued at $179,725. In addition, the Company agreed to pay $65,000 in cash within 30 days completion of its initial public offering and also issued warrants to purchase 45,500 shares of common stock at a strike price of $4.00. The warrants were valued at $65,338. Under the terms of this nonexclusive agreement, we have the right to use, assign and sublicense the marks, intellectual property and other rights in connection with "Chef Andre," "Andre Carthen," ACafe" or "Fit Chef" and all trade names, trademarks and service marks related to this intellectual property for the purpose of entering into sublicense agreements with third parties for the manufacture, marketing and sale of products utilizing these marks. In December 2018, the parties amended the agreement to remove the annual minimum guarantee in return for a one time payment of $70,000. We are amortizing the capitalized value of the cash, warrants and common stock over the seven year term of the agreement and have amortized $11,073$12,088 and $33,219$11,073 for the three and nine months ended June 30,March 31, 2019 and 2018, respectively, and have amortized $26,205 and $22,147 for the six months ended March 31, 2019 and 2018, respectively.
On September 8, 2017, the Company entered into a seven year wholesale license agreement with Nicholas Walker and issued 25,000 shares of common stock, valued at $98,750. In addition, the Company agreed to pay $40,000 in cash within 30 days completion of its initial public offering and also issued warrants to purchase 25,000 shares of common stock at a strike price of $4.00. The warrants were valued at $35,900. Under the terms of this nonexclusive agreement, we have the right to use, assign and sublicense the marks, intellectual property and other rights in connection with "Jardin," "Nicholas Walker," "Nicholas Walker Jardin," "Nicholas Walker Garden Party," "Cultivated by Nicholas Walker," and "Jardin Du Jour," and all trade names, trademarks and service marks related to this intellectual property for the purpose of entering into sublicense agreements with third parties for the manufacture, marketing and sale of products utilizing these marks. In December 2018, the parties amended the agreement to remove the annual minimum guarantee in return for a one time payment of $10,000. We are amortizing the capitalized value of the cash, warrants and common stock over the seven year term of the agreement and have amortized $6,237$6,382 and $18,712$6,237 for the three and nine months ended June 30,March 31, 2019 and 2018, respectively, and have amortized $13,055 and $12,475 for the six months ended March 31, 2019 and 2018, respectively.
In September 2017, the Company entered into an exclusive seven year license agreement with kathy ireland® Worldwide for the right to license the mark, intellectual property and other marks in connection with kathy ireland® Health & Wellness™. The agreement is for seven years for a license fee of $840,000. The Company has an option to extend for another three years for an additional price of $360,000. Per the agreement, $480,000 was paid prior to January 1, 2018. The remaining amount of $360,000 was due in equal installments on January 1 of subsequent years until the license fee is paid, and were classified as long term liabilities related party as of December 31, 2017. Under this license agreement with kathy ireland® Worldwide we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™. In January 2018, the Company amended its wholesale license agreement with kathy Ireland® Worldwide. The amendment accounted for the Company exercising its option on a three year extension and amending the payment terms related to this extension as follows: royalty payments to kathy ireland® Worldwide for the three year extension would be set at 35% of net proceeds, to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts due under the Agreement, $320,000, on the latter of January 1, 2019 or 30 days after the receipt by the Company of $5,000,000in net proceeds from sublicense agreements signed under the health and wellness trademarks. ThisOn December 20, 2018, both parties agreed to reduce the final amount is classified as an accrued expenseowed to related party as$300,000 if paid within 5 days, which was paid immediately. We are amortizing the asset over the ten year term of June 30, 2018. In addition, royalty payments to kathy ireland® Worldwidethe agreement and have amortized $29,031 and $30,000 for the additional three year extension are set at 35%months ended March 31, 2019 and 2018, respectively, and have amortized $58,064 and $60,000 for the six months ended March 31, 2019 and 2018, respectively.
On December 20, 2018, the Company completed the Mergers with Cure Based Development and acquired certain assets, including the trademark "cbdMD" and its variants and certain other intellectual property. The trademark is the cornerstone of net proceeds.this subsidiary and is key as we create and distribute products and continue to build this brand. We believe the trademark does not have limits on the time it will contribute to the generation of cash flows and therefore we have identified these as indefinite-lived intangible assets (see Note 2 for more information).
Intangible assets as of June 30, 2018March 31, 2019 and September 30, 20172018 consisted of the following:
| | | | |
| | | | |
Trademark and other intellectual property related to BPU | $486,760 | |
Trademark and other intellectual property related to I’M1 | 971,667 | $971,667 |
Trademark and other intellectual property related to EE1 | 471,667 | 471,667 |
Trademark and other intellectual property related to cbdMD | | 21,585,000 | - |
Trademark, tradename and other intellectual property related to kathy ireland®Health & Wellness™, net | 1,102,903 | 830,000 | 1,016,130 | 1,074,194 |
Cash, warrants and stock issued related to the Wholesale license agreement with Chef Andre Carthen, net | 273,151 | 307,146 | |
Cash, warrants and stock issued related to the Wholesale license agreement with Nicholas Walker, net | 153,858 | 173,047 | |
Wholesale license agreement with Chef Andre Carthen, net | | 305,871 | 262,077 |
Wholesale license agreement with Nicholas Walker, net | | 144,566 | 147,620 |
Trademark and other intellectual property related to BPU | | 234,421 | 246,760 |
Total | $3,460,006 | $3,240,287 | $24,729,322 | $3,173,985 |
| | |
The Company has threefour definite lived intangible assets, which have seven or ten year lives.
Future amortization schedule:
| | | | | | | | | | | | | | |
Trademark, tradename and other intellectual property related to kathy ireland® Health & Wellness™ | $1,102,903 | $32,903 | $120,000 | $590,000 | $1,016,130 | $58,065 | $116,129 | $493,549 |
Cash, warrant and stock issued related to the Wholesale license agreement with Chef Andre Carthen | $273,151 | $11,074 | $44,294 | $84,901 | |
Cash, warrant and stock issued related to the Wholesale license agreement with Nicholas Walker | $153,858 | $6,237 | $24,950 | $47,821 | |
Wholesale license agreement with Chef Andre Carthen | | $305,871 | $28,233 | $56,468 | 56,468 | $56,468 | $51,766 |
Wholesale license agreement with Nicholas Walker | | $144,566 | $13,345 | $26,689 | $24,465 |
Trademark and intellectual property related to BPU | | $234,421 | $12,337 | $24,676 | $123,380 |
The Company performs an impairment analysis at August 1 annually on the indefinite-lived intangible assets following the guidance in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. In addition, intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred and the Company evaluates the indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. The Company has performed a qualitative and quantitative analysis and for the years ended September 30, 20172018 and 2016 there has beenwas no impairment.
The Company performed a qualitative and quantitative analysis for the year ended September 30, 2018 accounting for the performance of BPU and the business shift in relation to its original business model and current focus on licensing and determined that an impairment was required. As a result, the Company recorded an impairment charge of $240,000 as impairment to intangibles under the BPU segment for the year ended of September 30, 2018. No other impairments were identified. Based upon the anticipated changes to BPU’s business model, the Company had determined that it was appropriate to reclassify the remaining carrying value of this intangible asset to a definite-lived asset. The Company began amortizing this asset beginning the first quarter of 2019. This reclassification was accounted for as a prospective change in estimate.
The Company has determined that no event or circumstances indicate likeliness of an impairment as of June 30, 2018.
March 31, 2019 for the current indefinite-lived intangible assets.
The Company also performs an impairment analysis at August 1 annually on the definite lived intangible assets following the guidance in ASC 360-10-35-21. We first assess if there is an indicator of possible impairment such as change in the use of the asset, market price changes in the asset, or other events that impact the value of the asset. If an indicator is present we then perform a quantitative analysis to determine if the carrying amount of the asset is recoverable. This is done by comparing the total undiscounted future cash flows of the long-lived asset to its carrying amount. If the total undiscounted future cash flows exceed the carrying amount of the asset, the carrying amount is deemed recoverable and an impairment is not recorded. If the carrying amount of a long-lived asset is deemed to be unrecoverable, an impairment loss needs to be estimated.
In order to calculate the impairment loss, the Fair Valuefair value of the asset must be determined. Fair Valuevalue referenced here is determined using the guidance in FASB ASC Topic 820. After assessing indicators for impairment, the Company determined that a quantitative analysis was not needed as of June 30, 2018.March 31, 2019.
NOTE 7 – CONVERTIBLE PROMISSORY NOTESNOTE
On October 4, 2016 and October 24, 2016,December 20, 2018, as part of the Mergers with Cure Based Development, the Company converted an outstanding liability held by Cure Based Development and issued in aggregate $2,125,000a $184,300 Promissory Note to Edge of 8% Convertible Promissory NotesBusiness, LLC, an entity controlled by the CEO of cbdMD. The liability was converted into an 18 month 6% promissory note. The note is interest only for the first 12 months and thereafter payable in six equal and consecutive monthly installments of principal and interest.
On December 20, 2018, with the closing of the Merger Agreement with Cure Based Development, we acquired a $20,000 note payable to accredited investors. The securities consistan individual, who is the owner of 8% Convertible Notes (the “Notes”) with warrantsCBD Now, LLC. CBD Now, LLC who now has a contractual right to purchase 141,676receive shares of the Company’s stock.company as part of the Merger. The warrants havenote is due on February 20, 2019, but also includes an exercise priceoption for the note holder to elect to extend the maturity date to February 20, 2020. The note bears interest at a rate of $7.80.12%. The warrants expire in September 2021.note was paid off on February 20, 2019.
Effective June 30, 2017,On December 20, 2018, with the Company convertedclosing of the Notes and all accrued interest of $127,500 into commonMerger Agreement with Cure Based Development, we acquired a $60,000 note payable to an individual who now has a contractual right to receive shares of the Companycompany as part of the Merger. The note is due on March 5, 2019, but also includes an option for the note holder to elect to extend the maturity date to March 5, 2020. The note bears interest at a pricerate of $3.95 per share. In this transaction, the Company issued 570,254 shares12%. As of common stock.
The Company accounted for the initial issuance of these Notes in accordance with FASB ASC Topic 470-20 “Debt with Conversion and Other Options”. The Black-Scholes valueMarch 31, 2019, $60,000 of the warrants, $5,159, associated with the issuancenote payable was outstanding and is recorded as a discount to debt and was amortized into interest expense. In addition,note payable – related party.
On December 20, 2018, with the issuanceclosing of the Notes and warrants were assessed and did not containMerger Agreement with Cure Based Development, we acquired a $500,000 note payable to an embedded beneficial conversion feature as the effective conversion price was not less than the relative fair valueindividual who now has a contractual right to receive shares of the instrument. Wecompany as part of the Merger. The note is due on March 31, 2019, but also had feesincludes an option for the note holder to elect to extend the maturity date to March 31, 2020, and the extension has been exercised at minimum through June 30, 2019. The note bears interest at a rate of $200,800 associated with12% and interest is paid monthly. As of March 31, 2019, $500,000 of the financing, whichnote payable was outstanding and is recorded as a debt discount and is being amortized over the term of the Notes. We have recorded no interest expensenote payable – related to these amounts for the three and nine months ended June 30, 2018.
The outstanding balances due under the Notes was $0 at both June 30, 2018 and September 30, 2017.party.
NOTE 8 – LINE OF CREDIT
In August 2015, we entered into a one year $1,000,000 revolving line of credit agreement with LBGLOC, LLC, a related party. Under the terms of the agreement, we agreed to pay interest on any amounts available for advance at the rate of 10% per annum. We granted LBGLOC, LLC a blanket security agreement on our assets as collateral for amounts advanced under the credit line. As additional consideration for granting the credit line, we issued the lender 16,000 shares of common stock, valued at $32,000 and was recorded as a debt discount and amortized over the term of the note.PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The agreement was renewedfollowing unaudited pro-forma data summarizes the results of operations for the three and six months ended March 31, 2019 and 2018, as if the Mergers with Cure Based Development had been completed on October 1, 2017. The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Mergers had taken place on October 1, 2017.
| Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 |
| | |
Net revenues | $N/A* | $3,661,686 |
Operating income (loss) | $N/A* | $1,728,190 |
Net income (loss) | $N/A* | $1,751,144 |
Net loss per share – basic and fully diluted | $N/A* | $0.08 |
| Six Months Ended March 31, 2019 | Six Months Ended March 31, 2018 |
| | |
Net revenues | $10,005,809 | $4,349,796 |
Operating income (loss) | $(4,388,615) | $231,246 |
Net income (loss) | $(33,109,651) | $217,431 |
Net loss per share – basic and fully diluted | $(1.31) | $0.01 |
* All entities were consolidated effective December 21, 2018, therefore the results of operations are included in these condensed financial statements.
For the per share calculation, it is being assumed that the shares to be issued contractually under the Merger Agreement, upon shareholder approval, have been issued. This would account for an additional one6,500,000 shares issued directly to the members of Cure Based Development and another 8,750,000 shares issued which would have a voting proxy and leak out on voting rights over a 5 year period on September 1, 2016. As additional consideration for renewing the credit line, we issued the lender 14,000 shares of common stock, which was valued at $105,000 based on the most recent equity financing in February 2016, and was recorded as a debt discount and was being amortized over the term of the note.period.
NOTE 9 – CONTINGENT LIABILITY
On June 6, 2017, pursuant to an agreement dated May 15, 2017,December 20, 2018 (the “Closing Date”), the lender convertedCompany, and its newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, both North Carolina limited liability companies, completed the outstanding principal balance ofMergers with Cure Based Development. The Merger Agreement provided that AcqCo LLC merge with and into Cure Based Development with Cure Based Development as the line of credit insurviving entity (the “Merger”), and immediately thereafter Cure Based Development merged with and into cbdMD LLC with cbdMD LLC as the amount of $593,797, togethersurviving entity (the “Secondary Merger” and collectively with the accrued interest of $179,380 forMerger, the “Mergers”). cbdMD LLC was renamed to CBD Industries LLC on April 10, 2019. CBD Industries LLC has continued as a total payoff amount of $773,177 into common shareswholly-owned subsidiary of the Company at a priceand maintains the operations of $3.95 per share. The Company recorded a loss on extinguishment of $8,750 which was recorded as interest expense inCure Based Development pre-closing.
As consideration for the consolidated statement of operations. In this transaction,Merger, the Company issued 195,740has a contractual obligation to issue 15,250,000 shares of our common stock.
stock, after approval by our shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 and 8,750,000, both of which are subject to leak out provisions, and the 8,750,000 tranche of shares will also vest over a five year period and are subject to a voting proxy agreement. The Merger Agreement also provides that an additional 15,250,000 shares of our common stock can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date (“earn out”).
The outstanding balances due undercontractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level 3 inputs, as estimating the agreements were $0 at both June 30, 2018fair value of these contingent liabilities require the use of significant and September 30, 2017.subjective inputs that may and are likely to change over the duration of the liabilities with related changes in internal and external market factors.
The initial two tranches totaling 15,250,000 shares have been valued using a market approach method and included the use of the following inputs: share price upon contractual obligation, discount for lack of marketability to address leak out restrictions, and probability of shareholder disapproval. In addition, the 8,750,000 shares in the second tranche also included an input for a discount for lack of voting rights during the vest periods.
The Merger Agreement also provides that an additional 15,250,000 shares (Earnout Shares) would be issued as part of the consideration for the Mergers, upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date as follows, as measured at four intervals (Marking Period): the completion of 12, 24, 42, and 59 calendar months from the Closing Date, and based upon the ratios set forth below:
Aggregate Net Revenues | | Shares Issued / Each $ of Aggregate Net Revenue Ratio |
| | |
$1 - $20,000,000 | | ..190625 |
$20,000,001 - $60,000,000 | | ..0953125 |
$60,000,001 - $140,000,000 | | ..04765625 |
$140,000,001 - $300,000,000 | | ..023828125 |
For clarification purposes, the Aggregate Net Revenues during a Marking Period shall be multiplied by the applicable Shares Issued/Each $ of Aggregate Net Revenue Ratio, minus, the number of shares issued as a result of Aggregate Net Revenues during the prior Marking Periods.
As discussed in Note 17, the initial 15,250,000 shares and Earnout shares were approved by our shareholders as of April 19, 2019.
The issuance of the Earnout Shares is also subject to prior shareholder approval.
The 15,250,000 shares which would be issued in the future, upon the satisfaction of net revenue criteria have been valued using a Monte Carlo Simulation. Inputs used included: stock price, volatility, interest rates, revenue projections, and likelihood of obtaining revenue projections, amongst others.
The value of the contingent liability is $102,267,557 at March 31, 2019, as compared to $71,353,483 at December 31, 2018. The increase of $30,914,074 is recorded in the Statement of Operations. The Company utilized both a market approach and a Monte Carlo simulation in valuing the contingent liability and a key input in both of those methods is the stock price. The main driver of the increase in the value of the contingent liability was the increase of the Company’s stock price, which was $4.42 at March 31, 2019 as compared to $3.09 on December 31, 2018.
NOTE 910 – RELATED PARTY TRANSACTIONS
In November 2016 we issued 20,000 shares of our common stock valued at $17,000 to Best Buddies International as a charitable contribution. Best Buddies International is an affiliate of a member of our board of directors.
On January 1, 2017, we entered into a sublease agreement for office space with Kure Corp. The lease is for one year and the space was to be used by our subsidiary BPU. A shareholder of Kure Corp. was Stone Street Capital, LLC, an affiliate of our CEO and Chairman and our CEO and Chairman was the past Chairman of Kure Corp. and is also a shareholder of Kure Corp. This sublease ended on January 1, 2018.
In February 2017 we entered into a master advisory and consulting agreement with kathy ireland® Worldwide, as amended, pursuant to which we have engaged the company to provide non-exclusive strategic advisory services to us under a term expiring in February 2025. Under the terms of this agreement, Ms. Ireland serves in the non-executive positions as our Chairman Emeritus and Chief Brand Strategist. The agreement also provides that kathy ireland® Worldwide will provide input to us on various aspects of our corporate strategies and branding, provides access to us of its in-house design team to assist us in developing our brands. As compensation under the agreement we agreed to pay kathy ireland® Worldwide a nominal monthly fee. We are also responsible for the payment of expenses incurred by Ms. Ireland or kathy ireland® Worldwide in providing these services to our company.
On February 8, 2017 the Company entered into a one year advisory agreement with Mr. Tommy Meharey pursuant to which he provides advisory and consulting services to us, including serving as co-Managing Director of I’M1. We have agreed to pay Mr. Meharey a fee of $15,000 per month for his services. We entered into a new agreement in March 2018 with the same terms, however the agreement after one year, if not renewed, will automatically extend month to month unless canceled by either party.
On February 8, 2017 the Company entered into a one year advisory agreement with Mr. Nic Mendoza pursuant to which he provides advisory and consulting services to us, including serving as co-Managing Director of EE1. We have agreed to pay Mr. Mendoza a fee of $10,000 per month for his services. We entered into a new agreement in March 2018 with the same terms, however the agreement after one year, if not renewed, will automatically extend month to month unless canceled by either party.
On February 8, 2017 the Company entered into a one year advisory agreement with Mr. Stephen Roseberry pursuant to which he provides advisory and consulting services to us, including serving as co-Managing Director of EE1 and I’M1. We have agreed to pay Mr. Roseberry a nominal monthly fee for his services. We entered into a new agreement in March 2018 with the same terms, however the agreement after one year, if not renewed, will automatically extend month to month unless canceled by either party.
In February 2017 the Company entered into an advisory agreement with Mr. Jon Carrasco, expiring in February 2019, pursuant to which he provides advisory and consulting services to us, including serving as Global Creative Director of EE1 and I’M1. We have agreed to pay Mr. Carassco a nominal monthly fee for his services.
In February 2017 EE1 arranged, coordinated and booked for Sandbox LLC a travel related event, arranging for travel and concierge related services. Under the terms of the oral agreement, EE1 was paid $68,550 for its services, which was recorded as consulting/advisory revenue. Sandbox LLC is an affiliate of a member of our board of directors.
In March 2017, our subsidiary I’M1 entered into a consulting agreement with Kure Corp. In this agreement I’M1 provided services delivered in two phases. The first phase was delivered by March 31, 2017 which included a social media blitz and marketing and branding support and strategies for $200,000. The second phase was delivered by June 22, 2017 which included modeling impressions for the brand and extension of publicity to other media outlets for $400,000. In addition, in March 2017, I’M1 entered into a separate licensing agreement for 10 years with Kure Corp. under which we will receive royalties based on gross sales of Kure Corp. products with the I’M1 brand.
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the Company converted the line of credit with LBGLOC LLC, which included the outstanding principal balance of $593,797 and the accrued interest of $179,380 for a total payoff amount of $773,177 into common shares of the Company at a price of $3.95 per share. One member of LBGLOC LLC, Stone Street Partners Opportunity Fund II LLC is an affiliate of our CEO and Chairman and received 94,475 shares of common stock in this transaction.
Effective June 30, 2017, the lenders converted the $2,125,000 principal amount of convertible promissory notes and all accrued interest of $127,500 into common shares of the Company at a price of $3.95 per share. One note holder, Stone Street Partners Opportunity Fund II LLC is an affiliate of our CEO and Chairman and received a total of 26,836 shares.
In June 2017, the Company earned a referral fee from kathy ireland® Worldwide after establishing a business meeting resulting in a new license agreement for kathy ireland® Worldwide. The referral fee was paid out of 200,000 options issued to kathy ireland® Worldwide from the new client, which were exercised and transferred to the Company. The shares are valued at $114,000, which was derived after assessing the value of our services provided and determining a per share value of $0.57. The warrant was exercised in June 2017 and the shares issued to the Company in August 2017.
In June 2017, Kure Corp. purchased products from our subsidiary BPU for resale in their stores. The total purchase was $97,850. Our CEO and Chairman is the past Chairman of Kure Corp. and is also a shareholder of Kure Corp.
In July 2017, the Company entered into subscription agreements for 133,000 shares of common stock with two accredited investors in a private placement, which resulted in gross proceeds of $525,350 to the Company. The accredited investors Stone Street Partners LLC and Stone Street Partners Opportunity Fund II LLC were affiliates of our CEO and Chairman.
On July 31, 2017, the Company sold preferred shares it had received from a customer as payment for services to a related party. The preferred shares were originally valued as marketable securities at $650,000 and were sold for $475,000, an approximation of fair market value, which was paid $200,000 in cash and a short term note of $275,000 at 3% interest, which is included in note receivable related party as of June 30, 2018 and September 30, 2017.2018. The short term note was extended on August 1, 2018, and the outstanding principal of $155,400 at 5% interest is due December 31,was paid in full on November 15, 2018. The Company recorded an impairment of $175,000 for the year ended September 30, 2017 (see Note 3).
On August 1, 2017, the Company entered into an additional advisory agreement with Kure Corp., in which the Company would act as an advisor regarding business strategy involving (1) conversion of Kure franchises into company stores, (2) conversion of Kure Corp. debt and preferred shares into common share of Kure Corp. and (3) preparation steps required and a strategy to position for a possible Reg A+ offering. The services are to be delivered in two phases, the first deliverables of items 1 and 2 above were delivered by September 30, 2017 and item 3 is to bewas delivered by June 30, 2018. The Company was paid $200,000 in Kure Corp. stock for the first deliverables and was paid $145,500 in cash for the second deliverable.
In August 2017, EE1 entered into a representation agreement with Romero Britto and Britto Central, Inc. under which it was appointed as exclusive licensing consultant to license certain intellectual property in entertainment industry category, which includes theatre, film, art, dance, opera, music, literary, publishing, television and radio, worldwide except for South America. Under the terms of the agreement, EE1 will identify and introduce Britto to potential license opportunities, negotiate terms of license agreements, and implement and administer each eligible license agreement entered. As compensation for our services, EE1 is entitled to receive 35% of the net proceeds received under any license, and following the termination or expiration of the agreement, 15% of the net proceeds of eligible licenses. The President of Britto Central, Inc is the spouse of a member of our board of directors.
In September 2017 EE1 arranged, coordinated and booked for Sandbox LLC a travel related event, arranging for travel and concierge related services. Under the terms of the oral agreement, EE1 was paid $64,475 for its services, which were recorded as consulting/advisory revenue. EE1 engaged Sterling Winters Company to assist with this service and incurred a cost of sales for that service of $35,421. Sandbox LLC is an affiliate of a member of our board of directors.
On September 1, 2017, the Company entered into a license agreement with kathy ireland® Worldwide for certain use of kathy ireland trademark, likeness, videos, photos and other visual presentations for the Company’s IPO and associated roadshow. The Company paid $100,000 for this agreement.
In September 2017 EE1 created a marketing campaign for a customer and worked through their approved vendor, Sandbox LLC, to deliver services. Under the terms of the oral agreement, EE1 was paid $550,000 for its services from Sandbox. Sandbox LLC is an affiliate of a member of our board of directors. EE1 engaged Sterling Winters Company to assist with this campaign and incurred expenses of $250,000. Sterling Winters Company is a subsidiary of kathy ireland® Worldwide.
On September 8, 2017, the Company extended its Master Advisory and Consulting Agreement, executed in February 2017, with kathy ireland® Worldwide to February 2025.
In September 2017, the Company entered into an exclusive seven year wholesale license agreement with kathy ireland® Worldwide for the right to license the mark, intellectual property and other marks in connection with kathy ireland® Health & Wellness™. The agreement is for seven years for a license fee of $840,000. The Company has an option to extend for another three years for an additional price of $360,000. Per the agreement, $480,000 was paid prior to January 1, 2018. The remaining amount of $360,000 are due in equal installments on January 1 of subsequent years until the license fee is paid, and were classified as long term liabilities related party as of December 31, 2017.paid. Under this license agreement with kathy ireland® Worldwide we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™. Royalties are paid at 33 1/3% of net proceeds with the license fee being a credit against royalties. On January 30, 2018, Level Brands,the Company amended its wholesale license agreement with kathy Ireland® Worldwide. The amendment accounted for the Company exercising its option on a three year extension and amending the payment terms related to this extension as follows: royalty payments to kathy ireland® Worldwide for the three year extension would be set at 35% of net proceeds, to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts due under the Agreement,agreement, $320,000 on the latter of January 1, 2019 or 30 days after the receipt by the Company of $5,000,000 in net proceeds from sublicense agreements signed under the health and wellness trademarks. ThisOn December 20, 2018, both parties agreed to reduce the final amount is classified as an accrued expense related party as of June 30, 2018. In addition, royalty paymentsowed to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds.$300,000 if paid within 5 days, which was paid immediately.
On December 11, 2017, the Company entered into a service agreement with Kure Corp., then a related party, to facilitate the “Vape Pod” transaction with the modular building systems vendor, SG Blocks, Inc., which is also a customer of our company. Under the terms of this agreement we also agreed to facilitate the introduction to third parties in connection with Kure Corp.'s initiative to establish Vape Pod's at U.S. military base retail locations and advising and aid in site selection for Kure retail stores on military bases and adjoining convenience stores, gas stations, and other similar retail properties utilizing Kure Corp.'s retail Vape Pod concept, among other services. As compensation for this recent agreement, we were issued 400,000 shares of Kure Corp.'s common stock which was valued at $200,000 (see Note 3).
On December 11, 2017 Level Brands also entered into a Revolving Line of Credit Loan Agreement with Kure Corp., pursuant to which we agreed to lend Kure Corp. up to $500,000 to be used for the purchase of prefabricated intermodal container building systems. This credit line was provided in connection with Kure Corp.'s recent Master Purchase Agreement with SG Blocks, Inc. for the purchase of 100 repurposed shipping containers for its Kure Vape Pod™ initiative. Under the terms of the Revolving Line of Credit Loan Agreement, Kure Corp. issued us a $500,000 principal amount secured promissory note, which bears interest at 8% per annum,3 Marketable Securities and which matures on the earlier of one year from the issuance date or when Kure Corp. receives gross proceeds of at least $2,000,000 from the sale of its equity securities. As collateral for the repayment of the loan, pursuant to a Security Agreement we were granted a first position security interest in Kure Corp.'s inventory, accounts and accounts receivable. Our CEO and Chairman is the past Chairman of Kure Corp. and currently a minority shareholder of Kure Corp. Level Brands is also a shareholder of Kure Corp. The Revolving Line of Credit has never been utilized and on June 6, 2018, the agreement was terminated.
On December 21, 2017, the Company entered into a sublease agreement with a related party for office space for its subsidiary BPU. The initial lease period is for six months and then changes to a month to month lease. The space includes office and warehouse space and will cost $3,000 per month.
On January 1, 2018, the Company entered into a consulting agreement with Mr. Craig Brewer, Chairman of Kure Corp., expiring in January 2019, pursuant to which he provides business consulting services to us, with a primary focus on BPU. The agreement may be canceled by either party with a 30 day notice. We have agreed to pay Mr. Brewer a fee of $9,000 per month for his services. This agreement ended on April 30, 2018.Other Investment Securities).
In June 2018, per our agreement with kathy ireland® Worldwide, the company earned a referral fee of $150,000 for facilitating a business opportunity which led to a new license agreement for kathy ireland® Worldwide. The Company is to receive 50% of all royalty revenue earned ongoing via the new business contract.
In April 2018 through June 2018, EE1 engaged in five separate statements of work for various marketing campaigns, production processes, and documentary related services for Sandbox LLC. Under the terms of the agreements, EE1 will be paidearned in the range of $200,000 to $250,000 for each statement of work, from Sandbox LLC. Sandbox LLC is an affiliate of a former member of our board of directors.
In September 2018, B&B Bandwidth purchased products from our subsidiary BPU for resale. The total purchase was $332,985. B&B Bandwidth management are affiliates of kathy ireland® Worldwide.
25On December 20, 2018, with the closing of the Merger Agreement with Cure Based Development, we recognized the following related party transactions which happened prior to the Mergers:
Cure Based Development has received $90,000 from Verdure Holdings LLC for future orders of the Company’s products. Verdure Holdings LLC is an affiliate of the CEO of cbdMD. This amount is recorded as customer deposits - related party on the accompanying balance sheet.
Cure Based Development entered a lease for office space, which also provides administrative and IT services, from an affiliate of the CEO of cbdMD. The lease is a month to month lease for $9,166 per month.
Cure Based Development leases its manufacturing facility from an entity partially owned by an individual who now has a contractual right to receive shares of the company as part of the Merger. The current lease was entered into on December 15, 2018 and is for three years at an annual base rent rate of $151,200 allowing for a 3% annual increase. In addition, common area maintenance rent is set at $25,200 annually.
As we engage in providing services to customers, at times we will utilize related parties, typically as a part of our agreement with kathy ireland® Worldwide, to assist in delivery of the services. For the three and nine months ended June 30,March 31, 2019 and 2018 we incurred related party cost of sales of approximately $745,000$0 and $1,228,000,$146,000, respectively. We had approximately $5,000For the six months ended March 31, 2019, and $42,000,2018 we incurred related party cost of sales respectively for the threeof approximately $161,500 and nine months ended June 30, 2017.$272,000, respectively
NOTE 1011 – SHAREHOLDERS’ EQUITY
Preferred Stock – We are authorized to issue 50,000,000 shares of preferred stock, par value $0.001 per share. Our preferred stock does not have any preference, liquidation, or dividend provisions. No shares of preferred stock have been issued.
Common Stock – We are authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 8,118,92810,170,356 and 5,792,2618,123,928 shares of common stock issued and outstanding at June 30, 2018March 31, 2019 and September 30, 2017,2018, respectively.
Common stock transactions:
In the three and six months ended March 31, 2019:
On November 17, 2017,October 2, 2018, the Company completed an IPOa secondary public offering of 2,000,0001,971,428 shares of its common stock for aggregate gross proceeds of $12.0approximately $6.9 million. The Company received approximately $10.9$6.3 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses paidpayable by us. The Company also issued to the selling agent warrants to purchase in aggregate 100,00051,429 shares of common stock with an exercise price of $7.50.$4.375. The warrants were valued at $171,600$86,092 and expire on September 27, 2022.28, 2023.
CommonIn January 2019, we issued 25,000 shares of our common stock transactions:to an investment banking firm for general financial advisory services. The shares were valued at $77,250, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending December 2019.
In January 2019, we issued 50,000 shares of our common stock to an investment banking firm for general advisory and investment bank services. The shares were valued at $212,500, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending April 2020.
In the three and ninesix months ended June 30,March 31, 2018:
On November 17, 2017, the Company completed an IPO of 2,000,000 shares of its common stock for aggregate gross proceeds of $12.0 million.
In November 2017, we issued 6,667 shares of our common stock to an individual as part of a consulting agreement. The shares were valued at $37,002, based on the trading price upon issuance and expensed as contract compensation.
In January 2018, we issued 230,000 shares of our common stock, which were granted as restricted stock awards on October 1, 2016 to board members. The restricted stock awards vested on January 1, 2018. The shares were valued at fair market value upon issuance at $195,500 and amortized over the vesting period and expensed as stock compensation.
In March 2018, we issued 5,000 shares of our common stock to an investor relations firm for services. The shares were valued at $20,000, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending June 2018.
In May 2018, we issued 60,000 shares of our common stock to an investment banking firm for general financial advisory and investment banking services. The shares were valued at $303,000, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending April 2019.
In June 2018, we issued 25,000 shares of our common stock to a broker dealer for business advisory services. The shares were valued at $118,000, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending December 2019.
In the three and nine months ended June 30, 2017:
Per terms in the Operating Agreement of BPU, the Company can redeem the 10% membership interest of Sigan Industries Group (“Sigan”) for $110,000 at any time before April 13, 2017. On October 14, 2016, Sigan entered into an agreement with the Company to transfer their 10% member interest for 129,412 shares of the Company’s common stock.
In October 2016 we issued 38,358 shares of our stock to six individuals and entities upon the cashless exercise of 70,067 placement agents warrants previously granted to a broker-dealer and its affiliates.
In November 2016 we issued Stone Street Partners, LLC an aggregate of 76,000 shares of our common stock valued at $570,000 as compensation for services, which had been accrued and expensed at September 30, 2016. The stock was valued at the time based on the most recent equity financing from February 2016 which was priced at what is a post reverse split price of $7.50.
In November 2016 we issued 20,000 shares of our common stock valued at $17,000 to Best Buddies International as a charitable contribution.
In January 2017 we issued 26,667 shares of our common stock to two individuals as part of consulting agreements. The shares were valued at $22,667, based on the valuation from the Company and expensed as salary compensation.
In January 2017, the Company acquired 51% ownership in IM1 in exchange for 583,000 shares of Level Brands common stock, which was valued at $495,550.
In January 2017, the Company acquired 51% ownership in EE1 in exchange for 283,000 shares of Level Brands common stock, which was valued at $240,550.
Effective April 28, 2017, Priel Maman entered into an agreement with the Company to transfer his 12% member interest in BPU for 155,294 shares of the Company’s common stock, valued at $132,000. The Company now owns 100% membership interest of BPU.
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the lender converted the outstanding line of credit principal balance of $593,797, together with the accrued interest of $179,380 for a total conversion amount of $773,177 into common shares of the Company at a price of $3.95 per share. In this transaction, the Company issued 195,740 shares of common stock.
Effective June 30, 2017, the lenders converted the $2,125,000 principal amount of convertible promissory notes and all accrued interest of $127,500 into common shares of the Company at a price of $3.95 per share. In this transaction, the Company issued 570,254 shares of common stock.
On June 30, 2017, the Company entered into subscription agreements for 77,000 shares of common stock with two accredited investors in a private placement, which resulted in gross proceeds of $304,150 to the Company. In this transaction, $102,700 was received subsequent to June 30, 2017.
On June 30, 2017, the Company entered into an agreement with an investor relations firm and as part of the compensation issued 5,000 shares of the Company’s common stock for services to be delivered through an IPO and no later than September 30, 2017. The shares were issued July 5, 2017 and valued at $19,750.
Stock option transactions:
InNo options were issued in the three and ninesix months ended June 30, 2018.March 31, 2019.
On May 14, 2018 we granted an aggregate of 50,000 common stockNo options to an employee. The options vest 50% November 14, 2018 and 50% May 14, 2019. The options have an exercise price of $5.27 per share and a term of seven years. We have recorded an expense for the options of $38,950 forwere issued in the three and ninesix months ended June 30,March 31, 2018.
On May 29, 2018 we granted an aggregate of 150,000 common stock options to an employee. The options vest 50% immediately and 50% January 1, 2019. The options have an exercise price of $4.78 per share and a term of ten years. We have recorded an expense for the options of $302,750 for the three and nine months ended June 30, 2018.
In the three and nine months ended June 30, 2017:
On October 1, 2016 we granted an aggregate of 14,300 common stock options to two employees. The options vest 16% immediately, 42% January 1, 2017 and 42% January 1, 2018. The options have an exercise price of $7.50 per share and a term of five years. We have recorded an expense for the options of $0 and $53, respectively, for the three and nine months ended June 30, 2018. We have recorded an expense of $53 and $524 for the three and nine months ended June 30, 2017.
On October 1, 2016 we granted an aggregate of 171,500 common stock options to two employees. The options vest ratably through January 1, 2018. The options have an exercise price of $7.50 per share and a term of six years. We have recorded an expense for the options of $0 and $4,802, respectively, for the three and nine months ended June 30, 2018. We have recorded an expense for the options of $4,802 and $14,406, respectively, for the three and nine months ended June 30, 2017.
On May 1, 2017 we granted an aggregate of 100,000 common stock options to one employee. The options vest 50% immediately and 50% on January 1, 2018. The options have an exercise price of $4.00 per share and a term of seven years. We have recorded an expense for the options of $0 and $4,031, respectively, for the three and nine months ended June 30, 2018. We have recorded an expense for the options of $13,438 and $13,438, respectively, for the three and nine months ended June 30, 2017.
The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the nine months ended June 30, 2018 and 2017:
| 2018 | 2017 |
Exercise price | $4.78 – $5.27 | $4.00 - $7.50 |
Risk free interest rate | 2.77% - 2.96% | 1.14% - 2.13% |
Volatility | 57.76% - 64.74% % | 54.69% - 60.39 |
Expected term | 7 – 10 years | 5 - 7 years |
Dividend yield | None | None |
The expected volatility rate was estimated based on comparison to the volatility of a peer group of companies in the similar industry. The expected term used was the full term of the contract for the issuances. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. Under ASU 2016-09 which amends ASC 718, the Company elected to change our accounting principle to recognize forfeitures when they occur. This change had no impact on beginning retained earnings as there had been no forfeitures estimated or incurred in prior periods. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.
Warrant transactions:
In the three and ninesix months ended June 30,March 31, 2019:
On October 2, 2018 in relation to the secondary offering, we issued to the selling agent warrants to purchase in aggregate 51,429 shares of common stock with an exercise price of $4.375. The warrants expire on September 28, 2023.
In the three and six months ended March 31, 2018:
On November 17, 2017 in relation to the IPO, we issued to the selling agent warrants to purchase in aggregate 100,000 shares of common stock with an exercise price of $7.50. The warrants expire on October 27, 2022.
In the three and nine months ended June 30, 2017:
On October 1, 2016, the board approved the strike price adjustment for certain placement agent warrants totaling 20,067 from a strike price of $8.75 to $5.00. On October 26, 2016, 38,358 shares were issued, upon a cashless exercise of the 20,067 warrants above and another 50,000 warrants, at a strike price of $2.75, which had been issued to a placement agent for prior services related to previous private placements of our securities.
On October 4, 2016 and October 24, 2016, we issued in aggregate, warrants exercisable into 141,676 shares of common stock with an exercise price of $7.80. The warrants expire on September 30, 2021. The warrants were issued in conjunction with the Company’s 8% convertible notes, described in Note 7.
The following table summarizes the inputs used for the Black-Scholes pricing model on the warrants issued in the ninethree months ended June 30, 2018March 31, 2019 and 2017:
2018:
| 2018 | 2017 |
Exercise price | $7.50 | $7.80 |
Risk free interest rate | 2.06% | 1.22% - 1.27% |
Volatility | 43.12% | 52.77% - 54.49% |
Expected term | 5 years | 5 years |
Dividend yield
| None | None |
| | |
Exercise price | $4.375 | $7.50 |
Risk free interest rate | 2.90% | 2.06% |
Volatility | 70.61% | 43.12% |
Expected term | 5 years | 5 years |
Dividend yield | None | None |
NOTE 1112 – STOCK-BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of Directors of Level Brands, Inc.the Company approved the 2015 Equity Compensation Plan (“Plan”). The Plan made 1,175,000 common stock shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The number of shares of common stock available for issuance under the Plan shall automatically increase on the first trading day of January each calendar year during the term of the Plan, beginning with calendar year 2016, by an amount equal to one percent (1%) of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, but in no event shall any such annual increase exceed 100,000 shares of common stock. On April 19, 2019, shareholders approved an amendment to the Plan and increased the amount of shares available for issuance under the Plan to 2,000,000 and retained the annual increase calculation.
We account for stock-based compensation using the provisions of FASB ASC 718. FASB ASC 718 codification requires companies to recognize the fair value of stock-based compensation expense in the financial statements based on the grant date fair value of the options. We have only awarded stock options since December 2015. All options are approved by the Compensation Committee of the Board of Directors. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method. The fair value of our stock option awards or modifications is estimated at the date of grant using the Black-Scholes option pricing model.
Eligible recipients include employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Options granted generally have a ten-year term and generally vest over one to
three years from the date of grant. Certain of the stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.
Stock Options – The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.
The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model which usesfor equity awards with time-based vesting provisions granted during the assumptions described above.year.
The following table summarizes stock option activity under the Plan:
| | Weighted-average exerciseprice | Weighted-average remaining contractual term (in years) | Aggregate intrinsic value (in thousands) | | Weighted-averageexerciseprice | Weighted-averageremainingcontractual term(in years) | Aggregateintrinsicvalue (inthousands) |
Outstanding at September 30, 2017 | 333,300 | 5.83 | | |
Outstanding at September 30, 2018 | | 469,650 | 5.13 | |
Granted | 200,000 | 4.90 | | - | |
Exercised | — | | - | |
Forfeited | 98,650 | 6.38 | | - | |
Outstanding at June 30, 2018 | 434,650 | $5.27 | 6.98 | $— | |
Outstanding at March 31, 2019 | | 469,650 | $5.13 | 6.48 | $— |
| | |
Exercisable at June 30, 2018 | 282,150 | $5.53 | 6.35 | $— | |
Exercisable at March 31, 2019 | | 444,650 | $5.13 | 6.50 | $— |
As of June 30, 2018,March 31, 2019, there was approximately $342,401$6,492 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 10 months.1 month.
Restricted Stock Award transactions:
On October 1, 2016 the Company issued 230,000 restricted stock awards in aggregate to board members. The restricted stock awards vested January 1, 2018. The stock awards are valued at fair market upon issuance at $195,500 and amortized over the vesting period. We recognized $0 and $39,100 of stock based compensation expense for the three and ninesix months ended June 30, 2018. We recognized $39,100 and $117,300 of stock based compensation expense for the three and nine months ended June 30, 2017. (See Note 10).March 31, 2018, respectively.
NOTE 1213 – WARRANTS
Transactions involving our equity-classified warrants are summarized as follows:
| | Weighted- average exercise price | Weighted- average remaining contractual term (in years) | Aggregate intrinsicvalue (inthousands) | | Weighted-averageexerciseprice | Weighted- averageremainingcontractualterm (in years) | Aggregateintrinsicvalue (inthousands) |
Outstanding at September 30, 2017 | 212,176 | $6.53 | | |
Outstanding at September 30, 2018 | | 312,176 | $6.84 | |
Issued | 100,000 | 7.50 | | 51,429 | 4.375 | |
Exercised | — | | - | |
Forfeited | — | | - | |
Outstanding at June 30, 2018 | 312,176 | $6.84 | 3.80 | $— | |
Outstanding at March 31, 2019 | | 363,605 | $6.49 | 3.26 | $— |
| | |
Exercisable at June 30, 2018 | 312,176 | $6.84 | 3.80 | $— | |
Exercisable at March 31, 2019 | | 363,605 | $6.49 | 3.26 | $— |
The following table summarizes outstanding common stock purchase warrants as of June 30, 2018:March 31, 2019:
| | Weighted- average exercise price | | | Weighted-averageexerciseprice | Expiration |
| | | | |
Exercisable at $7.80 per share | 141,676 | $7.80 | September 2021 | 141,676 | $7.80 | September 2021 |
Exercisable at $4.00 per share | 70,500 | $4.00 | September 2022 | 70,500 | $4.00 | September 2022 |
Exercisable at $7.50 per share | 100,000 | $7.50 | October 2022 | 100,000 | $7.50 | October 2022 |
Exercisable at $4.375 per share | | 51,429 | $4.375 | September 2023 |
| 312,176 | 6.84 | | 363,605 | 6.49 | |
NOTE 1314 – COMMITMENTS AND CONTINGENCIES
In September 2017 we entered into a wholesale license agreement with kathy ireland® Worldwide under which we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™.
As compensation under this agreement, we agreed to pay kathy ireland® Worldwide a marketing fee of $840,000, of which $480,000 was paid by December 31, 2017. The balance iswas payable in three equal annual installments beginning January 1, 2019, subject to acceleration. Under the terms of this agreement, we also agreed to pay kathy ireland® Worldwide a royalty of 33 1/3% of our net proceeds under any sublicense agreements we may enter into for this intellectual property.
In January 2018, Level Brands,the Company, amended its wholesale license agreement with kathy Ireland® Worldwide. The amendment accounted for the Company exercising its option on a three year extension and amending the payment terms related to this extension as follows: to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts due under the Agreement, $320,000 on the latter of January 1, 2019 or 30 days after the receipt by the Company of $5,000,000 in net proceeds from sublicense agreements signed under the health and wellness trademarks. This amount is classified as accrued expense to related party as of JuneSeptember 30, 2018. In addition, royalty payments to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds. The license fee paid is credited against any royalties to be paid. In December 2018, the Company agreed to and paid the balance owed as final payment at a reduced price of $300,000.
NOTE 1415 – SEGMENT INFORMATION
The Company operates through its fourfive subsidiaries in three business segments: the professional products, the licensing, and the entertainment divisions. The professional products division is designed to be an innovative and cutting-edge producer and marketer of quality hair care and other beauty products.various products, currently encompassing the CBD sector. The licensing division is designed to establish brands via licensing of select products / categories and encompasses our two subsidiaries with a focus on health and wellness products and men’s lifestyle products. The entertainment division’s focus is to become a producer and marketer of multiple entertainment distribution platforms.platforms and provide brand management services. The corporate parent also will generate revenue from time to time, through advisory consulting agreements. This revenue is similar to the entertainment divisions’ revenue process and we have allocated revenue from corporate to the entertainment division for segment presentation.
The professional products division operated for the full year in fiscal 20172018 and 2016.2017. The licensing and entertainment divisions were both acquired in January 2017. The Company’s results for the product division in the first two quarters of fiscal 2019 include cbdMD LLC from the Closing Date of the Mergers with Cure Based Development, on December 20, 2018.
The performance of the business is evaluated at the segment level. Cash, debt and financing matters are managed centrally. These segments operate as one from an accounting and overall executive management perspective, though each segment has senior management in place; however they are differentiated from a marketing and customer presentation perspective, though cross-selling opportunities exist and continue to be pursued.
Condensed summary segment information follows for the three and ninesix months ended June 30, 2018March 31, 2019 and 2017.2018.
Three months ended June 30, 2018: | |
| Professional Product Division | | | |
Net Sales | $27,205 | $1,629,835 | $191,390 | $1,848,430 |
Net Sales related party | $- | $- | $1,350,000 | $1,350,000 |
Total Net Sales | $27,205 | $1,629,835 | $1,541,390 | $3,198,430 |
Income (loss) from Operations before Overhead | $(123,394) | $1,001,079 | $346,540 | $1,224,225 |
Allocated Corporate Overhead (a) | 5,605 | 335,795 | 317,572 | 658,972 |
Net Income (Loss) | $(128,999) | $665,284 | $28,968 | $565,253 |
| | | | |
Three months ended June 30, 2017: | | |
Three months ended March 31, 2019: | | |
| | Three Months Ended September 30, 2016 |
| Professional Product Division | | | | | | | |
Net Sales | $291,342 | $470,667 | $511,000 | $1,273,009 | $5,647,553 | $5,189 | $20,609 | $5,673,351 |
Net Sales related party | $- | $400,000 | $114,000 | $514,000 | $- |
Total Net Sales | $291,342 | $870,667 | $625,000 | $1,787,009 | $5,647,553 | $5,189 | $20,609 | $5,673,351 |
Income (loss) from Operations before Overhead | $(399,304) | $41,573 | $248,497 | $(109,234) | $(910,143) | $301,459 | $(131,169) | $(739,853) |
Allocated Corporate Overhead (a) | 6,507 | 15,233 | 10,935 | 32,675 | (30,968,951) | (28,457) | (113,013) | (31,110,421) |
Net Income (Loss) | $(405,811) | $26,340 | $237,562 | $(141,909) | $(31,879,094) | $273,002 | $(244,182) | $(31,850,274) |
Three months ended March 31, 2018: | |
| Three Months Ended September 30, 2016 |
| | | | |
Net Sales | $29,672 | $2,781,714 | $214,979 | $3,026,365 |
Net Sales related party | $- | $- | $54,545 | $54,545 |
Total Net Sales | $29,672 | $2,781,714 | $269,524 | $3,080,910 |
Income (loss) from Operations before Overhead | $(267,144) | $2,226,001 | $(156,874) | $1,814,283 |
Allocated Corporate Overhead (a) | 1,802 | 116,311 | 40,950 | 159,062 |
Net Income (Loss) | $(268,946) | $2,109,690 | $(197,824) | $1,642,920 |
| | | | |
Nine months ended June 30, 2018: | | |
Six months ended March 31, 2019: | | |
| | Three Months Ended September 30, 2016 |
| Professional Product Division | | | | | | | |
Net Sales | $85,945 | $4,248,711 | $1,082,439 | $5,417,095 | $6,122,620 | $533,743 | $266,018 | $6,922,381 |
Net Sales related party | $- | $200,000 | $1,350,000 | $1,550,000 | $- |
Total Net Sales | $85,945 | $4,448,711 | $2,432,439 | $6,967,095 | $6,122,620 | $533,743 | $266,018 | $6,922,381 |
Income (loss) from Operations before Overhead | $(751,293) | $2,866,972 | $380,143 | $2,495,822 | $(846,305) | $(845,125) | $(229,052) | $(1,920,482) |
Allocated Corporate Overhead (a) | 19,151 | 991,277 | 542,004 | 1,552,432 | (28,407,899) | (2,476,476) | (1,234,279) | (32,118,654) |
Net Income (Loss) | $(770,444) | $1,875,695 | $(161,861) | $943,390 | $(29,254,204) | $(3,321,601) | $(1,463,331) | $(34,039,136) |
| | |
Assets | $3,669,414 | $7,737,134 | $5,063,736 | $16,470,284 | $85,084,141 | $6,199,693 | $3,573,556 | $94,857,390 |
| | |
Nine months ended June 30, 2017: | | |
Six months ended March 31, 2018: | | |
| | Three Months Ended September 30, 2016 |
| Professional Product Division | | | | | | | |
Net Sales | $865,890 | $1,135,667 | $611,280 | $2,612,837 | $58,742 | $2,818,875 | $581,959 | $3,459,576 |
Net Sales related party | $- | $600,000 | $182,550 | $782,550 | $- | $309,090 |
Total Net Sales | $865,890 | $1,735,667 | $793,830 | $3,395,387 | $58,742 | $2,818,875 | $891,049 | $3,768,666 |
Income (loss) from Operations before Overhead | $(1,272,383) | $754,962 | $181,153 | $(336,268) | $(627,898) | $1,865,892 | $33,602 | $1,271,596 |
Allocated Corporate Overhead (a) | 201,807 | 404,520 | 185,013 | 791,340 | 18,770 | 540,826 | 333,862 | 893,458 |
Net Income (Loss) | $(1,474,190) | $350,442 | $(3,860) | $1,127,608) | $(646,668) | $1,325,066 | $(300,260) | $378,138 |
| | |
Assets | $1,974,553 | $1,995,279 | $1,138,129 | $5,107,961 | $3,990,753 | $7,893,823 | $3,866,450 | $15,751,026 |
| | |
(a)
The Company began allocating corporate overhead to the business segments in April 2017. We have allocated overhead on a proforma basis for the three and ninesix months ended June 30,March 31, 2019 and 2018, and 2017respectively, above for comparison purposes.
NOTE 1516 – INCOME TAXES
The Company has adopted the provisions of ASU 2016-09 as of the beginning of the current fiscal year (October 01, 2017) which requires recognition through opening retained earnings of any pre-adoption date NOL carryforwards from nonqualified stock options and other employee share-based payments (e.g., restricted shares and share appreciation rights), as well as recognition of all income tax effects from share-based payments arising on or after October 1, 2017 (our adoption date) in income tax expense. The impact of the adoption of ASU 2016-09 was immaterial.
The Company has a valuation allowance against the net deferred tax assets, with the exception of the deferred tax liabilities that result from indefinite-life intangibles which cannot be offset by deferred tax assets.
On November 17, 2017, the Company completed an IPO. The Company conducted a preliminary Section 382 analysis and determined an ownership change likely occurred upon the IPO. Management has determined that the Company's federal and state NOL carryovers established up through the date of the ownership change may be subject to an annual limitation. The Company is in the process of determining the annual limitation.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted. As a result of the enactment, the U.S. corporate tax rate was changed from a progressive bracketed tax rate with the highest marginal rate of 35% to a flat corporate tax rate of 21%. The Company has revalued its deferred tax assets and liabilities at the date of enactment and the result was a reduction of the net deferred tax liability and a tax provision benefit of $12,000 which is reflected in the nine months ending June 30, 2018 financial statements.
On December 20, 2018, the Company completed a two-step merger with Cure Based Development (see Note 2). As a result of the Mergers the Company established as part of the purchase price allocation a net deferred tax liability related to the book-tax basis of certain assets and liabilities of approximately $5.1 million.
32
The Company has a valuation allowance against the net deferred tax assets, with the exception of the deferred tax liabilities that result from indefinite-life intangibles which cannot be offset by deferred tax assets and the deferred tax liabilities that resulted from the merger with Cure Based Development. The net deferred tax liability was reduced during the three and six months ending March 31, 2019 by approximately $1,075000 and $1,208,000, respectively, mainly due to the tax effected post merger, post law change NOL’s which have an indefinite life and can offset indefinite life deferred tax liabilities.
NOTE 1617 – SUBSEQUENT EVENTS
On AugustApril 19, 2019, following approval by our shareholders at the 2019 annual meeting held on April 19, 2019, we filed Articles of Amendment to our Articles of Incorporation changing the name of our company to “cbdMD, Inc.” effective May 1, 2019. Concurrent with the name change, the CUSIP number of our common stock will be changed to 12482W1018 and the symbol for our common stock which is listed on the NYSE American will be changed to “YCBD.” In addition, the shareholders of Level Brands, Inc. approved the issuance of an aggregate of 15,250,000 shares of our common stock pursuant to the rights granted as consideration for the mergers which closed on December 20, 2018 pursuant to the terms of the Agreement and Plan of Merger dated December 3, 2018 by and among our company, our wholly-owned subsidiaries and Cure Based Development, LLC. These shares were issued on April 22, 2019.
From April 26 to April 30, 2019, the Company extendedadded additional sponsorships, for the termcbdMD brand, that will extend our representation in the professional sports arena. These sponsorships increase our visibility and are with multiple entities or individuals and is expected to add to our advertising spend over the next three and half years by an aggregate amount of its original note receivable of $275,000 with a related party. The outstanding principal of $155,400 as of July 31, 2018, with 5% interest is due by December 31, 2018.$6.4 million.
On July 1, 2018,May 9, the Company entered into a marketing and consulting agreement andissued options to its board of directors as partialpart of the annual compensation issued 5,000 sharesplan. Six independent directors received in aggregate 120,000 options with an exercise price of its common stock, The shares were valued at $18,500, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending June 2019.$5.41 that expire in ten years.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations for the thirdsecond quarters of fiscal 20182019 and fiscal 2017 and the nine months then ended2018 should be read in conjunction with the condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors and Business sections in our 20172018 10-K, this report, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.
Overview
Level Brands strives to be an innovative licensing, marketing and brand management company with a focus on lifestyle-based products. We champion a bold, unconventional image, and social consciousness for our company and our brands. Working closely with our Chairman Emeritus and Chief Brand Strategist, Kathy Ireland, the Chairman, CEO and Chief Designer ofkathy ireland® Worldwide, we seek to secure strategic licenses and joint venture partnerships for our brands, as well as to grow the portfolio of brands through strategic acquisitions.Business
We operate our business in fourfive business units, including:
| Founded in 2017 and first conceptualized bykathy ireland® Worldwide, I'M1 is a men’s lifestyle brand established to capitalize on potentially lucrative licensing and co-branding opportunities with products focused on millennials.
|
| |
| Our newest business unit Level Health & WellnessH&W was established in September 2017 and has an exclusive license to the kathy ireland® Health & Wellness™ brand. Its goal is to create a brand which will include a wide variety of licensed products and services, targeted to both Baby Boomers as well as millennials. This unit began operating in fiscal 2018.
|
| Founded in early 2017 and first conceptualized bykathy ireland® Worldwide, I'M1 is a men’s lifestyle brand established to capitalize on potentially lucrative licensing and co-branding opportunities with products focused on millennials. |
| Also founded in early 2017, EE1 was established to serve as a producer and marketer of experiential entertainment including recordings, film, TV, web and live events, and entertainment experiences. EE1 also provides brand management services including creative development and marketing, brand strategy, and distribution support. |
| |
"Beauty belongs to everyone"
| Beauty & Pin-Ups, our first business unit is a professional hair care line with a social conscience and launched its products in 2015. We offer quality hair care products, including shampoos, conditioners, styling aides and a patented styling tool, through an expanding professional salon distribution network, retailers and online outlets and are expanding into licensing opportunities. |
| Our newest business unit, CBD Industries, was established in December 2018 in connection with the Mergers with Cure Based Development LLC. In connection with the Mergers, we acquired the cbdMD brand. CBD Industries producesand distributesvarious high-grade, premium CBD products under the cbdMD brand, including: tinctures, capsules, gummies, bath bombs, vape oils, topical creams and animal treats and oils. |
Our business model is designed with the goal of maximizing the value of our brands through either acquisition of strategic brands with a portfolio of products or entry into license agreements with partners that are responsible for the design, manufacturing and distribution of our licensed products. We promote our brands across multiple channels, including print, television and social media. We believe that this “omnichannel” (or multi-channel) approach, which we expect will allow our customers to interact with each of our brands, in addition to the products themselves, will be critical to our success.
We began reportingAs described elsewhere in this report, on December 20, 2018 we completed the Mergers with Cure Based Development and its historic operations are now conducted by cbdMD, our subsidiary. Prior to the Mergers, Cure Based Development, which was founded in 2017, reported revenues by segment duringof $3,280,009 and a net loss of $353,561 for the second quartereight months ended August 31, 2018. On the closing of fiscal 2017the Mergers, and in order to ensure the continuity of the operations, Mr. R. Scott Coffman and Ms. Caryn Dunayer, Cure Based Development’s CEO and President, respectively, joined cbdMD and Mr. Coffman joined our board of directors. Our consolidated balance sheet at March 31, 2019, appearing elsewhere in this report, reflects the impact of the Mergers, and our consolidated statement of operations for the three and six months ended March 31, 2019 also appearing elsewhere in this report includes the results of cbdMD beginning on the Mergers closing date.
As consideration in the Mergers, the members of Cure Based Development received the contractual rights to receive shares of our common stock following shareholder approval as described elsewhere in this report. On April 19, 2019 at our acquisitions2019 annual meeting the shareholders of I'M1 and EE1. We report in three business segments:Level Brands, Inc. approved the licensing,issuance of an aggregate of 15,250,000 shares of our common stock, representing the entertainmentFirst Tranche Shares and the professional products divisions. The licensing division is comprised of two of our business units focused on establishing licensing contracts in two areas: men’s lifestyle products branded under I’M1 (grooming, personal care, cologne, accessories, jewelry and apparel) and health and wellness related products branded under kathy ireland® Health & Wellness™, which began operations in December 2017. EE1 comprises the entertainment division and it’s focus is to produce and market multiple entertainment distribution platformsSecond Tranche Shares, as well as engagethe possible issuance of an additional 15,250,000 Earnout Shares (as those terms are defined in brand management services.the Merger Agreement). The issuance of the shares will constitute a change of control under the rules and regulations of the NYSE American and we were required to file and meet the initial listing standard of the NYSE American, which the Company has done and received acceptance from the NYSE. In addition the shareholders approved the change of our company’s name from Level Brands, Inc. to revenues generated in each of these segments, the corporate parent also will generate revenue from time to time, through advisory consulting agreements. This revenue is similar to the entertainment divisions’ revenue processcbdMD, Inc. The name change has been filed with all appropriate agencies and we have allocated revenue from corporate to the entertainment division for segment presentation. The professional products division today is comprised of Beauty and Pin-Ups and is designed to be an innovative and cutting-edge producer and marketer of quality hair care and other beauty products.became effective May 1, 2019.
Growth Strategies and Outlook
Level BrandsThe Company expanded its business operations in fiscal 2017over the past two years to include two new divisions through which it now has a committed focus oncapabilities in licensing and branding services. In addition, we added a third division at the end of fiscal 2017 which began operations in fiscal 2018. This expansion has positioned Level Brands with licensing segments in millennial men’s lifestyle and the health and wellness arena, for women and their families at every age. We believe that Level Brands also has solid capabilities related to brand management services and has seen success in early stages by engagingmost recently with several customers.
We believe that in working closely with our Chairman Emeritus and Chief Brand Strategist, Kathy Ireland, the Chair, CEO and Chief Designer of kathy ireland® Worldwide, and leveraging the expertise and talentstrategic acquisition of the kathy ireland ® Worldwide executive team, we have opportunitycbdMD brand, to secure strategic licensesbe a manufacturer and joint venture partnerships for our brands, as well as to continue to grow the portfoliodistributor of brands we manage and represent. We are implementing the kathy ireland® Worldwide “blueprint” and utilize the kathy ireland® Worldwide team as we expand our licensing and branding business.products in an emerging market space.
We are pursuing the following strategies to continue to grow our revenues and expand our business and operations during the balance of fiscal 20182019:
●
With the recent strategic acquisition of the cbdMD brand and the passage of the Farm Bill which removed CBD as a Schedule 1 controlled substance, we must continue to expand visibility and distribution in this emerging space and capitalize on the current positioning of the brand to build it into fiscal 2019:the top recognized brand in the sector. We expect to do this by:
o
Expanding distribution to larger wholesalers as this will now be possible with the Farm Bill passage;
o
Continue to identify and develop CBD product offerings that fit into the mainstream for consumption based on market research and trends; and
o
Continue development of all advertising, media and sales channels.
●
Increase our base of licensed offerings: We believe that in building a strong brand, we must begin with intellectual property. The development of quality intellectual property (“IP”), is frequently one of the most expensive ongoing costs in a licensing operation. The unique kathy ireland® Worldwide “blueprint” for IP development, allows us economies of scale, which is a foundation for Level Brands tothe licensing business under the Company which can bring virtually unlimited products and services of quality, through the appropriate distribution channels to meet the demands of our targeted customers. With current executed contracts encompassing products in fashion, accessories, beverages, personal care, health care, and spirits, which are already in development or available at brick and mortar stores and online retailers, we believe we have a foundation to continue to build upon for additional offerings. For example, for our I’M1 brand this will include a wide array of lifestyle items for millennial men and for our kathy ireland® Health & Wellness brand this will encompass products and/or services that appeal to Baby Boomers and Millennials. We expect to continue to grow our base of licensed products by:
o
Innovating and identifying market trends through an ongoing effort based on research of products, tracking buying and demand trends and subsequently identifying the right manufacturer for fulfillment, i.e. utilizing cannabidiol (“CBD”) in unique formats under our kathy ireland® Health & Wellness brand under the terms of our license agreement with our client Isodiol International Inc.fulfillment.; and
o
Identifying new product offerings in response to evolving customer demands in our focusedtargeted areas, that meet our criteria, and with our branding support could increase our reach to new customers.
●
Cross-sell opportunities: With EE1 continuing to grow its portfolio of brand management customers, we believe we will continue to have opportunities to identify products that fit our criteria for additional licensing opportunities under our Beauty & Pin-Ups, I’M1 or kathy ireland® Health & Wellness brands.
●
EE1 will seek to continue to expand this brand’s offering of entertainment productions (currently providing production services for two television shows and a recording project of a tribute album of Lennon/McCartney classics by GRAMMY award winning artists) as we assess current projects involving television and movies for the best financial opportunity as well as look to expand experiential offerings.
Results of operations
Sales
The following tables provide certain selected consolidated financial information for the periods presented:
Selected Consolidated Financial Data | Three Months Ended March 31, | Six Months Ended March 31, |
| | | | | | |
| | | | | | |
Net sales | $5,673,351 | $3,026,365 | 87.5% | $6,992,381 | $3,459,576 | 102.1% |
Net sales related party | - | 54,545 | (100.0)% | - | 309,090 | (100.0)% |
Total net sales | $5,673,351 | $3,080,910 | 84.1% | $6,992,381 | $3,768,666 | 85.5% |
Cost of sales | 2,134,662 | 523,821 | 307.5% | 2,625,670 | 751,945 | 249.2% |
Gross profit as a percentage of net sales | 62.4 | 83.1 | (20.7)% | 62.1 | 80.1 | (18.0)% |
Operating expenses | 5,939,334 | 937,123 | 533.8% | 7,484,275 | 2,624,768 | 185.1% |
(Increase) decrease on contingent liability | (30,914,074 | - | (100.0)% | (30,914,074 | - | (100)% |
Net income (loss) before taxes | (32,925,274 | 1,619,920 | (2132.5)% | (35,247,136 | 322,138 | (1104.2)% |
Net income (loss) attributable to cbdMD, Inc. common shareholders | $(31,791,738 | 1,404,397 | 326.4% | $(33,901,451 | $271,469 | 125.9% |
| Three Months Ended June 30, | Nine Months Ended June 30, |
| | | | | | |
| | | | | | |
| $1,848,430 | $1,273,009 | 45.2% | $5,417,095 | $2,612,837 | 107.3% |
| 1,350,000 | 514,000 | 162.6% | 1,550,000 | 782,550 | 98.1% |
| $3,198,430 | $1,787,009 | 78.9% | $6,967,095 | $3,395,387 | 105.2% |
| 1,106,706 | 261,420 | 323.3% | 1,858,651 | 822,556 | 125.9% |
Gross profit as a percentage of net sales | 65.4% | 85.4% | (20.0)% | 73.3% | 75.8% | (2.5)% |
| 1,464,239 | 853,670 | 71.5% | 4,089,006 | 2,536,586 | 61.2% |
| 627,485 | 671,919 | (12.2)% | 1,019,438 | 36,245 | 2712.6% |
Net income (loss) attributable to Level Brands, Inc. common shareholders | $206,074 | $(210,690) | 197.8% | $477,542 | $(1,400,406) | 134.1% |
Sales
We began reporting our revenues by segment during the second quarter of fiscal 2017 following our acquisitions of I'M1 and EE1. The following table provides information on the contribution of net sales by segment to our total net sales.
| Three Months ended June 30 2018 | | Three Months ended June 30 2017 | | |
| | | | | Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 | |
| | |
Licensing division | $1,629,835 | 50.9% | $870,667 | 48.7% | $5,189 | 0.1% | $2,781,714 | 90.3% |
Entertainment division | 1,541,390 | 48.2% | 625,000 | 35.0% | $20,609 | 0.4% | $269,524 | 8.7% |
Professional products division | 27,205 | 0.9% | 291,342 | 16.3% | |
Products division | | $5,647,553 | 99.5% | $29,672 | 1.0% |
Total net sales | $3,198,430 | 100% | $1,787,009 | 100% | $5,673,351 | | $3,080,910 | |
| Nine Months ended June 30 2018 | | Nine Months ended June 30 2017 | | |
| | | | | Six Months Ended March 31, 2019 | | Six Months Ended March 31, 2018 | |
| | |
Licensing division | $4,448,711 | 63.9% | $1,735,667 | 51.1% | $533,743 | 7.7% | $2,818,875 | 74.8% |
Entertainment division | 2,432,439 | 34.9% | 793,830 | 23.4% | $266,018 | 3.8% | $891,049 | 23.7% |
Professional products division | 85,945 | 1.2% | 865,890 | 25.5% | |
Products division | | $6,122,620 | 88.5% | $58,742 | 1.5% |
Total net sales | $6,967,095 | 100% | $3,395,387 | 100% | $6,922,381 | | $3,768,666 | |
The increase in net sales attributable to our products division in the three and six months ended March 31, 2019 is due to the acquisition of the cbdMD brand on December 20, 2018 and the continuing growth of this emerging business.
The decrease in net sales attributable to our entertainment and licensing divisions in the three and six months ended March 31, 2019 is primarily associated with a change in business focus as the Company integrates the new emerging business sector associated with our brand cbdMD and assesses overall strategy for integration of all business units.
As described elsewhere in this report, from time to time we accept equity positions as compensation for our services. The following table provides information for the three and six months ended March 31, 2019 and 2018 regarding the amount of our total net sales in each of those periods for which we received an equity position in lieu of cash.
Three Months Ended March 31,
|
| |
| | | |
$0 | 0% | $2,750,000 | 89.2% |
Six Months Ended March 31,
|
| |
| | |
$470,000 | $3,204,500 | 85.0% |
With the new operations in 2017business focus shifting with our cbdMD brand, accepting of our three new subsidiaries, I’M1, EE1, and Level H&W, the overall business strategy was expanded to not only include new business lines that generate revenues from new sources (licensing, royalty, and advisory) but also a different approach, in some cases, regarding the type of payments we would accept. We have entered into agreements where we have accepted common stock, options or warrants (an equity position).positions as compensation should be rare. This practice has had an adverse impact on immediateour cash flow from operations and holding these equitiessecurities could be subject our company to fair value adjustment which could resultadditional valuation impacts in future period losses. Inperiods as a result of the three and nine months ended June 30, 2018, of our net sales approximately of $3,198,000 and $6,967,000 respectively, we have received compensation in the form of equity positions totaling $1,150,000, and $4,154,500, respectively. In the three and nine months ended June 30, 2017, of our net sales approximately of $1,787,000 and $3,395,000, respectively, we received compensation in the form of equity positions totaling $912,000 and $1,562,000.
Licensing division
The licensing division began operating in January 2017 and enters into various license agreements that can provide revenues based on royalties and advertising/marketing fees and additional revenues basedneed to value these holdings on a percentage of defined sales. This division added the Health & Wellness unit in October 2017 with initial revenue being recognized in the three months ended March 31, 2018. Minimum royalty and advertising/marketing revenue is recognized on a straight-line basis over the term of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding to the licensee’s sales. Payments received as consideration of the grant of a license are recognized ratably as revenue over the term of the license agreement and are reflected on our consolidated balance sheets as deferred license revenue at the time payment is received and recognized ratably as revenue over the term of the license agreement. Similarly, advanced royalty payments are recognized ratably over the period indicated by the terms of the license and are reflected on our consolidated balance sheet in deferred license revenue at the time the payment is received. In regard to revenue for advisory and promotional services provided through a consulting agreement, we record revenue when the services are provided and the customer is invoiced at agreed upon rates and terms in the agreement.
Net sales for the licensing division for the three and nine months ended June 30, 2018 increased 87.2%and 156.3% as compared to the three and nine months ended June 30, 2017. The large increase is due primarily to two significant licensing agreements engaged by the Health & Wellness unit which generated approximately $1,600,000 and $4,356,000 of revenue in the three and nine months ended June 30, 2018, respectively. In the three and nine months ended June 30, 2018 this division recorded $1,150,000 and $3,900,000, respectively, of revenue which was an equity position as compared to $456,000 and $1,106,000 for the three and nine months ended June 30, 2017, respectively.
Entertainment division
The entertainment division began operating in January 2017 and enters into advisory agreements for brand management services as well as agreements to produce entertainment related events, which include production assistance for television and music recording agreements. In regard to sales for advisory and production related services, we record revenue when the services are provided and the customer is invoiced at agreed upon rates and terms in the agreement. Additional revenue earned at the corporate level for advisory agreements is included in the entertainment division for segment reporting.
Net sales for the entertainment division for the three and nine months ended June 30, 2018 increased 146.6%and 206.4% as compared to the three and nine months ended June 30, 2017. The increase is due to new engagements for the division. In the three and nine months ended June 30, 2018 this division recorded $0 and $454,500, respectively, of revenue which was received as an equity position as compared to $456,000 for both the three and nine months ended June 30, 2017.
Professional products division
Net sales for the professional products division for the three and nine months ended June 30, 2018 decreased 90.7%and 90.1% as compared to the three and nine months ended June 30, 2017. This decrease is primarily attributable to a strategic decision made at the end of fiscal 2017, to change our distributors as well as also testing other sales channels, including large retail and online channels and adding licensing opportunities, all of which we are still transitioning into. As of the end of June 30, 2018, we have engaged with two retailers and are testing the products in these new channels and have also executed our first two license contracts for this division and expect product rollout to begin in the summer of 2018. We believe these changes will support the product line and sales process better, although no assurance can be given as to when and if our product line will receive more acceptance in the marketplace.
As is customary in the wholesale distribution of hair care and beauty products, we provide our distributors an allowance against the sales price for advertising and distribution, damaged good, product development allowance, and a discount if paid within a prescribed time frame, which is typically 2% if paid within 10 days. These allowances were 9.0% and 21.7%, respectively, of gross sales of our professional products division for the three months ended June 30, 2018 and 2017 and were 21.5% and 48.5% for the nine months ended June 30, 2018 and 2017. The higher allowance in the fiscal 2017 periods is related to discounting of hair irons to our old distribution channel in an effort to offer incentives to customers and move historical products as we prepared and launched three new products in fiscal 2017 as well as a rollout of a discounted sample sized product with our entrance into a new sales channel.
Cost of sales
Our cost of sales includes costs associated with distribution, external fill and labor expense, components, and freight for our professional products divisions, and includes labor, third party service providers and amortization for IP for our licensing and entertainment divisions and costs associated with distribution, manufacturing, third party fill and labor expense, components, and freight for our products divisions. OurThe following table provides information on the percentage of our cost of sales to our net sales for each segment for the three and six months ended March 31, 2019 and 2018:
| Three Months Ended March 31, | Six Months Ended March 31, |
Licensing division | | | | |
Entertainment division | 559.4% | 6.9% | 33.8% | 9.3% |
Products division | 315.8% | 77.2% | 93.5% | 39.2% |
| 36.1% | 408.8% | 35.9% | 238.2% |
The increase in cost of sales as a percentage of net sales was 34.6% and 26.7%for our licensing division in the three and ninesix months ended June 30, 2018, respectively,March 31, 2019 is attributable to the loss of one major contract and its associated revenue and transition costs during that process. The percentage is not reflective of the financial impact as compared to 14.6% and 24.2% in the three and nine months ended June 30, 2017, respectively. In order to explain the change in cost of sales we must account for the two new divisions (licensing and entertainment) and look at each of our three divisions separately to see the cumulative impact.
In our licensing division, cost of sales was 11.0% and 9.9% of its net sales for the three and nine months ended June 30, 2018, respectively, as compared to 3.5%March 31, 2019 totaled approximately $29,000 against sales of approximately $5,000. Currently we are assessing the integration strategy and 7.5%viability of how this division can provide internal support for our cbdMD brand within our products division.
For the three and ninesix months ended June 30, 2017, respectively. ForMarch 31, 2019, the current periods, we incurredentertainment division provided television production services, which involve a higher cost of sales asand finalized services related to the business is maturing and we laid groundwork on social media andrecording production, items to increase visibility of our licensed brands, I’M1 and kathy ireland® Health & Wellness™, which we believe will be used innot generate sales until future distribution processes begin. Overall, the future to support the brand and future contracts as well as the amortization of our IP for this division. In addition, we engaged in a significant contract for our kathy ireland® Health & Wellness unit which required significant efforts regarding a marketing campaign and strategy. We expect this division to have a cost of sales between 10% and 20% as the business is structured in a manner such that the licensee (our customer) incurs the significant costs and revenues associated with the sale of licensed products. We recognize the associated royalty fees on a net basis. When we are involved in providing advisory services, we allocate the utilized internal resources costs to our cost of sales.
In our entertainment division, cost of sales was 58.9% and 51.7% of its net sales for the three and nine months ended June 30, 2018, respectively, as compared to 5.9% and 17.4% for the three and nine months ended June 30, 2017, respectively. The costpercentage of sales for thisour entertainment division will vary based upon the type of projects in which it is involved. For instance, its costCurrently we are assessing the integration strategy and viability of sales is expected to be lesshow this division can provide internal support for advisory services, which utilize internal resources, as compared to television production services which require the use of external facilities and personnel, which increases our cost. As a result,cbdMD brand within our gross margin for the entertainment division will vary from period to period, however we expect our cost of sales to be between 45% and 58% based on the mix of projects we target.products division.
In our professional products division, the significant decrease in the cost of sales was 70.2% and 185.0%as a percentage of its net sales for the three and nine months ended June 30, 2018, respectively, as compared to 66.7% and 75.6% in the three and ninesix months ended June 30, 2017, respectively.March 31, 2019 is related to the acquisition of the cbdMD brand on December 20, 2018, and the overall impact of its growing revenues in this division as well as the low cost of sales this business has, which was approximately 36%. We expect this division to maintain cost of sales as a percentage of net sales, between 25% and 40%, as we manage our overall cost for manufacturing and production. The significant increasecost of sales in the fiscal 2018 periods on a percentage basis is primarily related to inventory impairments, as a result of net realizable value and excess inventory calculations and a decrease in the actual sales as disclosed above. Cost of sales variances are primarilyall related to two key factors. First, allowances from this division have varied significantly based on the product line not having wide appeal yet and various advertising and promotional packages have been used to promote the products since initial launch. Second, in fiscal 2017 we moved into an online channel and conducted our first online promotion to create more brand visibility, and with this provided significant discount pricing on a new packaged item designed specifically for that channel. In addition, we have added two new distributors at the end of fiscal 2017 and although not at the same level as previously, we had promotional packages for these new launches. As we continue to refine our operations and assess our overall business strategy, we are assessing ways to decrease our cost of sales.hair care products.
Operating expenses
Our majorprincipal operating expenses include wages, advertising, travel, rent, professional service fees, and expenses related to industry distribution and trade shows. Our operating expenses wereon a consolidated basis increased approximately $1,464,000533.8% and $854,000 for185.1% in the three and six months ended June 30,March 31, 2019 from the same periods in 2018, respectively. The significant increase is attributable to the merger of the cbdMD brand as well as the ramp up of this business as reflected in the tables below. This included increases in: (i) staff related expenses; (ii) accounting and 2017, an increase of $610,000 or 71.5%. The operatinglegal expenses; (iii) travel and entertainment expenses, also included non-cash expenses for stock compensation and depreciation of approximately $364,000 and $76,000 for the three months ended June 30, 2018 and 2017, respectively. Specifically, during the three months ended June 30, 2018 as compared to same period in fiscal 2017 our outside services related to investor relations, transfer agent, other public company support entities increased by approximately $47,000,(iv) expenses related to social media, public relations, advertising and marketing process, tradeshows and promotions increased approximately $288,000, ourpromotions; (v) affiliate and influencer commissions; (vi) outside services related to investor relations, transfer agent, other public company support costs; (vii) rent expense increased $36,000, our charitable contributions increased approximately $12,000, ourexpense; (viii) insurance expense; and (ix) non-cash stock compensation expense, increased approximately $294,000, and our business insurance increased approximately $52,000. These increases were offset by certain decreasesa decrease in the allocation of corporate management fees which are described in greater detail later in this report.
We acquired I’M1 and EE1 in January 2017, Level H&W did not commence operations until December 2017, and cbdMD was acquired December 2018. Accordingly, we did not incur operating expenses for these business units during the entirety of the comparable periods. The additional changes in our expenses is directly related to the operational changes in our company as we grew from one operating business segment to three, built the infrastructure to support the overall company from a growth perspective, and completed our initial public offering and transaction to a public company traded on the NYSE American, and established processes as well as a business focus to gain efficiencies with a focus on results.
The following table provides information on our approximate operating expenses for each segment for the three and six months ended March 31, 2019 and 2018:
| Three Months Ended March 31, | |
| | | |
| | | |
Licensing division | $38,412 | $363,000 | $(324,588) |
Entertainment division | $78,949 | $218,000 | $(139,051) |
Products division | $4,423,315 | $168,000 | $4,255,315 |
| Six Months Ended March 31, | |
| | | |
| | | |
Licensing division | $108,700 | $694,000 | $(585,300) |
Entertainment division | $212,335 | $508,000 | $(295,665) |
Products division | $4,662,391 | $473,000 | $4,189,391 |
Operating expenses attributable to our licensing and entertainment divisions for the three and six months ended March 31, 2019 and 2018, included: (i) accounting and legal expenses; (ii) expenses related to social media, public relations, advertising, marketing, promotions and tradeshows; and (iii) professional outside services. The overall decrease in operating expenses during such period asis related to a shift in business focus of the company and an ongoing assessment of an integration strategy and viability of how these divisions can provide internal support for our cbdMD brand within our products division.
Operating expenses attributable to our products division for the three and six months ended March 31, 2019 and 2018, included: (i) staff related expenses decreased approximately $21,000, ourexpenses; (ii) accounting and legal expenses decreased by approximately $13,000 as the IPO process was completed, and ourexpenses; (iii) travel and entertainment expenses, decreased approximately $35,000.
Our operating expenses were approximately $4,089,000 and $2,536,000 for the nine months ended June 30, 2018 and 2017, an increase of $1,553,000 or 61.2%. The operating expenses also included non-cash expenses for stock compensation and depreciation of approximately $456,000 and $204,000 for the nine months ended June 30, 2018 and 2017, respectively. Specifically, during the nine months ended June 30, 2018 as compared to same period in fiscal 2017 our staff related expenses increased approximately $408,000 and our accounting and legal expenses increased by approximately $77,000. In addition, during the nine months ended June 30, 2018 as compared to the same period in fiscal 2017,(iv) expenses related to social media, public relations, advertising and marketing process, tradeshows and promotions increased approximately $739,000, our travelpromotions; (v) affiliate and entertainment expenses increased approximately $13,000,influencer commissions; (vi) outside services related to investor relations, transfer agent, other public company support costs; (vii) rent expense; and our rent expense increased $84,000, our charitable contributions increased approximately $56,000, our stock compensation expense increased $268,000, and our business(viii) insurance increased approximately $142,000. These increases were offset by certain decreasesexpense.
The significant increase in operating expenses during such period as our commissions paidfor the Products division, is related to an outside sales consultant decreased approximately $37,000,the merger of CBDI and its operations as well as we hadthe ramping up of the overall business, which included increased staff hiring, a decrease of $200,000 of one time start-upfull blown advertising and marketing process and expenses for the new divisions.related to infrastructure expansion.
The realignment and change in expenses is directly related to the changes in the Company as it increased from one operating business segment to three and built the infrastructure to support the overall company from a growth perspective as well as completed the process to become a public entity.
Licensing divisionCorporate overhead and allocation of management fees to our segments
OperatingIncluded in our consolidated operating expenses in the licensing division were approximately $450,000 and $1,145,000 for the three and nine months ended June 30, 2018, respectively, as compared to $624,000 and $776,000 for the three and nine months ended June 30, 2017, a decrease of 27.8% and an increase of 47.6%, respectively. For fiscal 2017, the licensing division was formed in January 2017 and therefore was only operating for six months of the period. In addition, for the periods ending June 30, 2017, we had referral fees of $528,000 paid toare expenses associated with our corporate entity for two large contracts.
Operating expenses for the three months ended June 30, 2018 and 2017, respectively, includeoverhead which are not allocated to a specific segment of our operations, including (i) staff related expenses which were approximately $0 and $15,000,expenses; (ii) accounting and legal expenses of approximately $0 and $17,000,expenses; (iii) expenses related to social media, public relations, advertising, marketing, promotions and tradeshow of approximately $154,000 and $11,000,tradeshows; (iv) travel and entertainment expenses of approximately $2,000 and $7,000,expenses; (v) professional outside services of approximately $3,000services; (vi) rent; (vii) non-cash stock compensation expense; (viii) business insurance expense; and $0, and allocated management fees from corporate of $290,000 and $45,000. Staff related expenses are now attributed to our cost of sales as we now are 100% allocated to supporting license agreements for clients.
Operating expenses for the nine months ended June 30, 2018 and 2017, respectively, include staff related expenses which were approximately $36,000 and $57,000, accounting and legal expenses of approximately $130,000 and $25,000, expenses related to social media, public relations, advertising, marketing, promotions and tradeshow of approximately $326,000 and $13,000, travel and entertainment expenses of approximately $18,000 and $7,000, professional outside services of approximately $6,000 and $0, and allocated management fees from corporate of $574,000 and $45,000.(ix) interest expense. The overall change in operating expenses for both the three and nine months comparative periods is related to the maturation of the new division and expenses related to its day to day operations growth. We expect to continue to allocate corporate management fees to this division in future periods, however, the amount of such fees will vary depending upon the amount of time devoted by our senior management to this division. The corporate charges eliminate upon consolidation of our financial statements.
Entertainment division
Operating expenses in the entertainment division were approximately $287,000 and $795,000 for the three and nine months ended June 30, 2018, respectively, as compared to $339,000 and $475,000 for the three and nine months ended June 30, 2017, a decrease of 15.5% and an increase of 67.4%, respectively. For fiscal 2017, the entertainment division was formed in January 2017 and therefore was only operating for six months of the period. In addition, for the periods ending June 30, 2017, we had referral fees of $228,000 paid to our corporate entity for one large contract.
Operatingnon-cash stock compensation expenses for the three months ended June 30,March 31, 2019 and 2018 and 2017, respectively, include staff related expenses which were approximately $0 and $30,000, accounting and legal expenses of approximately $8,000$19,000 and $14,000, expenses related to social media, public relations, advertising, marketing, promotionsrespectively and tradeshow offor the six months ended March 31, 2019 and 2018 were approximately $118,000$163,000 and $21,000, travel and entertainment expenses of approximately $2,000 and $0, professional outside services of approximately $3,000 and $0, and allocated management fees from corporate of $145,000 and $45,000. Staff related expenses are now attributed to our cost of sales as we now are 100% allocated to service delivery for clients.$70,000, respectively.
Operating expenses for the nine months ended June 30, 2018 and 2017, respectively, include staff related expenses which were approximately $36,000 and $58,000, accounting and legal expenses of approximately $108,000 and $19,000, expenses related to social media, public relations, advertising, marketing, promotions and tradeshow of approximately $302,000 and $23,000, travel and entertainment expenses of approximately $8,000 and $0, professional outside services of approximately $16,000 and $0, and allocated management fees fromThe following table provides information on our approximate corporate of $312,000 and $45,000. The overall change in operating expenses for both the three and nine months comparative periods is related to the maturation of the new division and expenses related to its day to day operations growth. We expect to continue to allocate corporate management fees to this
division in future periods, however, the amount of such fees will vary depending upon the amount of time devoted by our senior management to this division. The corporate charges eliminate upon consolidation of our financial statements.
Professional products division
Operating expenses in the professional products division were approximately $126,000 and $583,000overhead for the three and ninesix months ended June 30, 2018, respectively, as compared to $483,000March 31, 2019 and $1,436,000 for the three and nine months ended June 30, 2017, a decrease of 73.9% and 59.4%, respectively.2018:
Operating expenses for the three months ended June 30, 2018 and 2017, respectively, include staff related expenses which were approximately $21,000 and $125,000, accounting and legal expenses of approximately $0 and $23,000, expenses related to social media, public relations, advertising, marketing, promotions and tradeshow of approximately $31,000 and $123,000, travel and entertainment expenses of approximately $0 and $46,000, professional outside services related to product formulation, design, and marketing expenses of approximately $1,000 and $20,000, commissions paid to an outside sales consultant of approximately $0 and $1,200, and allocated management fees from corporate of $48,000 and $45,000, respectively. Three Months Ended March 31, | |
| | | |
$1,288,000 | $ | $571,000 | 717,000 |
Operating expenses for the nine months ended June 30, 2018 and 2017, respectively, include staff related expenses which were approximately $214,000 and $428,000, accounting and legal expenses of approximately $39,000 and $176,000, expenses related to social media, public relations, advertising, marketing, promotions and tradeshow of approximately $54,000 and $257,000, travel and entertainment expenses of approximately $14,000 and $107,000, professional outside services related to product formulation, design, and marketing expenses of approximately $5,000 and $133,000, commissions paid to an outside sales consultant of approximately $2,000 and $38,000, and allocated management fees from corporate of $128,000 and $45,000, respectively. We expect to continue to allocate corporate management fees to this division in future periods, however, the amount of such fees will vary depending upon the amount of time devoted by our senior management to this division. The corporate charges eliminate upon consolidation of our financial statements.
The overall decrease in operating expenses for both the three and nine months comparative periods is related to management’s shift to a more structured approach as the strategy for this business unit was reviewed and repositioned to expand beyond a single channel focus.
Corporate overhead
Corporate overhead operating expenses were approximately $1,080,000 and $2,556,000 for the three and nine months ended June 30, 2018, respectively, as compared to $284,000 and $695,000 for the three and nine months ended June 30, 2017, an increase of 280.7% and 268.0%, respectively.
Corporate operating expenses for the three months ended June 30, 2018 and 2017, respectively, include staff related expenses which were approximately $220,000 and $93,000, accounting and legal expenses of approximately $93,000 and $61,000, expenses related to social media, public relations, advertising, marketing, promotions and tradeshow of approximately $139,000 and $0, travel and entertainment expenses of approximately $19,000 and $4,000, professional outside services of approximately $98,000 and $38,000, rent of approximately $67,000 and $12,000, a non-cash stock compensation expense of $356,000 and $61,000, and business insurance expense of approximately $52,000 and $2,000.
Corporate operating expenses for the nine months ended June 30, 2018 and 2017, respectively, include staff related expenses which were approximately $915,000 and $250,000, accounting and legal expenses of approximately $259,000 and $241,000, expenses related to social media, public relations, advertising, marketing, promotions and tradeshow of approximately $303,000 and $3,000, travel and entertainment expenses of approximately $99,000 and $12,000, professional outside services of approximately $155,000 and $52,000, rent of approximately $154,000 and $52,000, a non-cash stock compensation expense of approximately $426,000 and $158,000, and business insurance expense of approximately $146,000 and $5,000.
Six Months Ended March 31, | |
| | | |
$2,469,000 | $ | $1,475,000 | 994,000 |
The overall increase in corporate operating expenses for both the three and nine months comparative periods is related to the maturation of the entire organization and structuring related to its day to day operations.operation including special events (merger and secondary offering activity) and ongoing public company related expenses.
Interest expenseHistorically, we have allocated a portion of our corporate overhead to our segments in the form of a management fee. These allocations are included in the operating expenses by segment in the earlier table. As set forth above, these internal corporate charges eliminate upon consolidation of our financial statements. The following table provides information on the allocation of management fees to our segments for the three and six months ended March 31, 2019 and 2018:
| Three Months Ended March 31, | |
| | | |
| | | |
Licensing division | $0 | $234,000 | $(234,000) |
Entertainment division | $0 | $117,000 | $(117,000) |
Products division | $0 | $39,000 | $(39,000) |
| Six Months Ended March 31, | |
| | | |
| | | |
Licensing division | $25,000 | $284,000 | $(259,000) |
Entertainment division | $25,000 | $167,000 | $(142,000) |
Products division | $25,000 | $79,000 | $(54,000) |
We are currently assessing our overall integration strategy and approach and have not created allocations for the three months ended March 31, 2019.
Other income and other non-operating expenses
Our interest expense decreased to $232 and $737 for the three and nine months ended June 30, 2018 from approximately $229,000 and $500,000 for the three and nine months ended June 30, 2017. The decrease was related to $0 borrowings in the three and nine months ended June 30, 2018 under the 8% convertible promissory notes issued and sold in October 2016. The 8% convertible promissory notes were converted to equity as of June 30, 2017.Interest income (expense)
InOur interest income (expense) was $18,086 and $2,045 for the three months ended June 30, 2017, we convertedMarch 31, 2019 and 2018, respectively. For the $2,125,000 principal amountsix months ended March 31, 2019 and 2018, our interest income (expense) was $62,119 and $3,920, respectively.
Contingent liability
As consideration for the Merger, the Company has a contractual obligation to issue 15,250,000 shares of 8% Convertible Promissory Notes and all accrued interest of $127,500 into our common stock, after approval by our shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 and 8,750,000, both of which are subject to leak out provisions, and the 8,750,000 tranche of shares will also vest over a five year period and are subject to a voting proxy agreement. The Merger Agreement also provides that an additional 15,250,000 shares of our common stock can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date (“earn out”). The initial 15,250,000 shares and we accounted for a conversion inducement in accordance with ASC 470-20 on the conversion price reduction from $5.00 to $3.95 per share and recorded a non-cash debt conversion expense of $446,250 at June 30, 2017. This is a one-time non-cash charge. We also sold marketable securities we had received from a customer for services. In this transaction, we determined that an other-than-temporary impairment on securities of $175,000 occurred and recorded the loss in the consolidated statement of operationsearnout shares were approved by our shareholders as of June 30, 2017.April 19, 2019.
In some cases, we may, from time to time, enter into contracts where all orThe contractual obligations and earn out provision are accounted for and recorded as a portioncontingent liability with increases in the liability recorded as a non cash other expense and decreases in the liability recorded as a non cash other income. The value of the consideration provided bycontingent liability is $102,267,557 at March 31, 2019, as compared to $71,353,483 at December 31, 2018. The increase of $30,914,074 is recorded as an expense in the customerStatement of Operations. The Company utilizes both a market approach and a Monte Carlo simulation in exchange for our servicesvaluing the contingent liability and a key input in both of those methods is the stock price. The main driver of the increase in the value of the consideration provided could decline and require an impairment chargecontingent liability was the increase of the Company’s stock price, which was $4.42 at March 31, 2019 as compared to be recorded in non-operating income in the consolidated statement of operations. We did not have any impairments in the three and nine months ended June 30, 2018 or 2017.$3.09 on December 31, 2018.
Other comprehensive incomeRealized gain (loss) on marketable securities
The Company valuesWe value investments in marketable securities at fair value and recordsrecord a gain or loss upon sale at each period in realized gain (loss) on marketable securities. For the three and six months ended March 31, 2019, we recorded a loss of $185,834 and $211,507 for the sale of securities we held (see Note 3 Marketable Securities and Other Investment Securities). We did not have any sale of securities in the three and six months ended March 31, 2018.
Unrealized gain (loss) on marketable securities
On October 1, 2018, as a result of the adoption of ASU 2016-01 –Financial Instruments, the Company now records changes in fair value of equities held as unrealized gains (losses) on marketable securities in the statement of operations.
We value investments in marketable securities at fair value and record an unrealized gain or loss within the statements of operations, a non-cash entry, at each period beginning October 1, 2018 and prior to that recorded unrealized gain or loss in other comprehensive income (loss) unless a decline is determined to be other-than-temporary.. For the three and six months ended June 30,March 31, 2019, we recorded an unrealized gain (loss) net of taxes, of $557,193 and $(996,110), respectively. For the three and six months ended March 31, 2018, and 2017, we recorded $33,500 and $(630,077) of other comprehensive income (loss), net of $(1,326,727) and $0, respectively. For the nine months ended June 30, 2018 and 2017, we recorded other comprehensive income (loss) of $(1,923,304) and $0,taxes, respectively.
Net income (loss) and net income (loss) attributable to our common shareholders
Our net incomeloss for the three and ninesix months ending June 30, 2018March 31, 2019 increased 498.3%2,038.6% to $565,253$31,850,274 and 183.6%9101.8% to $943,390,$34,039,136, respectively, as compared to a net lossincome of $141,909$1,642,920 and $1,127,608$378,138 in the three and ninesix months ended June 30, 2017,March 31, 2018, respectively. At June 30,March 31, 2019 and 2018, and 2017, we owned 100% of the membership interestinterests of Beauty & Pin-Ups and 100% of the membership interest in Level H&W. At June 30,March 31, 2019 we owned 100% of the membership interest of CBDI. At March 31, 2019 and 2018 and 2017 we owned 100% of the voting interests in each of I'M1 and EE1 and 51% membership interest in each of I’M1 and EE1. As such we account for the noncontrolling interest in each of I’M1 and EE1 based on their gains or losses. Based on the noncontrolling interest for these entities, this can have a negative impact on the gains or losses to our shareholders. After allocating a portion of the net gain to the noncontrolling interests in accordance with generally accepted accounting principles, our net incomeloss increased approximately 198%2,363.7% and 134%12,588.2% for the three and ninesix months ended June 30, 2018March 31, 2019 from the same periods in fiscal 2017.2018.
Liquidity and capital resourcesCapital Resources
We had cash and cash equivalents on hand of $5,423,862$4,639,587 and working capital of $11,319,410$12,272,931 at June 30, 2018March 31, 2019 as compared to cash on hand of $284,246$4,282,553 and working capital of $2,170,154$10,820,192 at September 30, 2017.2018. Our current assets increased 238.9%approximately 19.9% at June 30, 2018March 31, 2019 from September 30, 2017,2018, and is primarily attributable to an increase of cash, all accounts receivables,receivable, merchant reserve, marketable and other securities, prepaid expenses, and inventory, offset by a decrease in noteaccounts receivable related party, inventory,other, notes receivable, and deferred IPOissuance costs. Our current liabilities decreased 21.1%increased approximately 92.9% at June 30, 2018March 31, 2019 from September 30, 2017.2018. This decreaseincrease is primarily attributable to decreases in accrued expenses which was offset by an increaseincreases in accounts payable, notes payable, customer deposits, and accrued expenses, offset by decreases in deferred revenue. Both the changes in our current assets and current liabilities are also reflective of the further development of our business during fiscal 2018 and2019 as well as the impactMergers of completion of an initial public offering. In November 2017 we completed an IPO and recorded $954,421 of deferred IPO costs which were directly attributable to the offering and were charged against the gross proceeds of the offering as a reduction of additional paid-in capital.Cure Based Development. In July 2017 we sold, to a related party, an equity position in a customer that we had received as compensation for services and we received a portion in cash and the balance as a short term note receivable for $275,000. As of JuneSeptember 30, 2018, the note balance is $161,573.
was $156,147, the note was paid in full in November 2018.
During the three and ninesix months ending June 30, 2018ended March 31, 2019 we used cash primarily to fund our operations in addition to increases in our marketableaccounts receivable, and other securities. We offer net 30 day terms and our receivables generally turn approximately every 16 days.merchant reserve.
We do not have any commitments for capital expenditures. We have sufficient working capital to fund our operations and to fund our expected growth.
Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations and we have generated the income to meet this goal, however as we have accepted equity as compensation in many of our engagements, we have not met this goal as cash flow from operations has been a net use of $4,840,368$4,462,372 and $1,417,352$3,552,831 for the first ninesix months ended March 31, 2019 and 2018, respectively.
On November 16, 2017 we closed an IPO and raised net proceeds of fiscal$10,932,535. On October 2, 2018 we closed a follow-on firm underwritten public offering of shares of our common stock resulting in total net proceeds to us of $6,356,998. We are using the net proceeds from the offering for brand development and fiscal 2017, respectively.expansion, acquisitions and general working capital.
Related Parties
As described in Note 910 to our consolidated financial statements appearing elsewhere in this report, we have engaged in a significant number of related party transactions. As indicated previously, we are a party to multiple agreements with kathy ireland® Worldwide, its principals and its affiliates, therefore as the companies work together on various opportunities, we at times have leveraged thekathy ireland®ireland® Worldwide enterprise to assist with delivery and in some cases to engage through them with customers. In addition, with the Mergers with Cure Based Development we acquired liabilities from related party transactions between it and its members in the form of financing notes and leases, which are described in Note 10. Due to the significance of these transactions we have reported transactions with related parties within the consolidated financial statements as well as within the notes to the consolidated financial statements. In addition, our CEO is an affiliate of a company who is a customer of ours and who continues to conduct ongoing business with us, the customer was acquired by a non-related public entity and as of April 30, 2018 is not considered a related party. These transactions also are reported as sales with related parties (see Note 910 Related Party Transactions in the consolidated financial statements for more information).
Critical accounting policies
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“US GAAP”) and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to our consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
Please see Part II, Item 7 – Critical Accounting Policies appearing in our 20172018 10-K for the critical accounting policies we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.
Recent accounting pronouncements
In May 2014, August 2015Please see Note 1 –Organization and May 2016,Summary of Significant Accounting Policies appearing in the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers, and ASU 2015-14 Revenue from Contracts with Customers, Deferral of the Effective Date, respectively, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance under US GAAP, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enableconsolidated financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2016. These ASUs may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption.
Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations(“ASU 2016-08”); ASU No. 2016-10,Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing(“ASU 2016-10”); ASU No. 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients(“ASU 2016-12”); and ASU No. 2016-20,Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers(“ASU 2016-20”).
We are assessing the impact, if any, of implementing this guidance on our consolidated financial position, results of operations and liquidity. We will adopt this standard in the first quarter of fiscal 2019 retrospectively with a cumulative adjustment to retained earnings.
In February 2016, the FASB issued ASU 2016-02, Leases. The purpose of ASU 2016-02 is to establish the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. We are assessing the impact, if any, of implementing this guidance on our consolidated financial position, results of operations and liquidity.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The amendmentsincluded in this update provided guidancereport for information on eight specific cash flow issues. This update is to provide specific guidance on each of the eight issues, thereby reducing the diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted. We are assessing the impact, if any, of implementing this guidance on our consolidated financial position, results of operations and liquidity.
In January 2017, the FASB issued ASU 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.accounting pronouncements.
Off balance sheet arrangements
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
ITEMITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for a smaller reporting company.
Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information relating to our company, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Overover Financial ReportingReporting.. There were noDuring the three months ended March 31, 2019, the Company made the following remediation changes in ourrelated to internal controlcontrols over financial reporting during our most recent fiscal quarter that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. These changes are:
●
In response to the identified material weakness associated with our Form 10Q/A for the period ended December 31, 2018, our management, with the oversight of the Audit Committee of the Board of Directors, formalized a review process which includes the CFO and VP of Finance, whereby each new accounting standard will be assessed and documented as to it’s impact on the Company’s financial statements and the effective date of those standards that require adoption. We believe this new control will help ensure timely adoption of applicable new accounting standards.
PARTPART II - OTHER INFORMATIONITEMITEM 1. LEGAL PROCEEDINGS.
None.
ITEMITEM 1A. RISK FACTORS.
In additionWe desire to take advantage of the other information set forth in this report, you should carefully consider“safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Accordingly, we incorporate by reference the risk factors discusseddisclosed in Part I, Item 1A inof our 2017Form 10-K and our subsequent filingsfor the year ended September 30, 2018, filed with the SEC which could materially affect our business, financial condition or future results.
We areSecurities and Exchange Commission on December 12, 2018 subject to the new or modified risk of possibly becoming an investment company underfactors appearing below that should be read in conjunction with the Investment Company Act of 1940.risk factors disclosed in such Form 10-K.
THERE ARE NO ASSURANCES WE WILL SUCCESSFULLY INTEGRATE THE CURE BASED DEVELOPMENT BUSINESSES INTO OUR BUSINESS, WHICH WOULD ADVERSELY AFFECT THE COMBINED COMPANY’S FUTURE RESULTS.
In December 2018 we closed the Mergers with Cure Based Development. The Investment Company Actsuccess of 1940 regulates certain companies that investthis transaction will depend, in hold or trade securities. Although we do not believe we are engagedlarge part, on the ability of the combined company to realize anticipated benefits from combining the businesses of the companies. The failure to successfully integrate and to successfully manage the challenges presented by the integration process may result in the businessfailure to achieve some or all the anticipated benefits of investing, reinvesting or trading in securities,the transaction, which may have a material adverse effect on our operations and we do not currently hold ourselves out to the public as being engaged in those activities,financial condition. Potential difficulties that may be encountered in the past we have accepted securitiesintegration process include the following:
| ● | the potential disruption of, or the loss of momentum in, each company’s ongoing business; |
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| ● | using the combined company’s assets efficiently to develop the business of the combined company; |
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| ● | potential unknown or currently unquantifiable liabilities associated with the Mergers and the operations of the combined company; |
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| ● | potential unknown and unforeseen expenses and delays associated with the Mergers and the possibility that integration costs may be material; |
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| ● | performance shortfalls at one or both companies as a result of the diversion of management’s attention caused by integrating the companies’ operations; |
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| ● | necessary changes in the operations and culture of the acquired company post-closing in order to accommodate the changes from a privately-held company with a limited operating history to a subsidiary of a public company; |
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| ● | complexities associated with managing the combined businesses, including difficulty addressing possible differences in corporate cultures and management philosophies; |
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| ● | significant increases in our operating expenses; and |
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| ● | additional business, financial and operating risks we have yet to identify. |
There are no assurances that the Mergers will ultimately result in the realization of our client companies as partial compensation. As a result,the anticipated economic benefits and principally related to the compensation paid to us by Isodiol International, Inc. under the terms the license agreement we entered into with it in December 2017, at March 31, 2018 we exceeded the exemptive assetother expected synergies, or that such anticipated economic benefits and revenue thresholds under Section 3(a)(1)(C) of Investment Company Act of 1940. Accordingly, we may have become an inadvertent investment company. As it has never been our intentother expected synergies will take longer than excepted to be an investment company, we have taken certain actions to bring us back under these exemptive thresholds. While as of June 30, 2018 our assets no longer exceed the asset threshold, as a result of our agreement with Isodiol International, Inc. entered into in December 2017, as compensation we are entitled to receive additional shares of Isodiol’s securities on a quarterly basis in an amount equal to $750,000. While at June 30, 2018 we did not exceed either the asset test or the revenue test, we have exceeded one or both of those during at least one quarter in the preceding four fiscal quarters.We will continue to limit the amount of equity we accept as compensation for services provided so as to stay under the income threshold as indicated in the Investment Company Act of 1940 going forward. As a result, we may structure transactions in a less advantageous manner than if we did not have Investment Company Act of 1940 concerns, or we may avoid otherwise economically desirable transactions due to those concerns.realized. If we are unable to reducefully realize the perceived benefits from the Mergers on a timely basis, we may be required to in the future impair some or all of the goodwill associated with this transaction which would materially adversely impact our assets belowresults of operations in future periods.
CBDMD LLC HAS A LIMITED OPERATING HISTORY THAT IMPEDES OUR ABILITY TO EVALUATE ITS POTENTIAL FUTURE PERFORMANCE AND STRATEGY.
Our wholly-owned subsidiary, cbdMD, succeeded to the exemptive level within one year, or ifoperations of Cure Based Development following the Closing of the Mergers in December 2018. We formed cbdMD in connection with the Mergers and it were otherwise establishedhad no operating history prior to the Mergers. Cure Based Development was formed in 2017 and did not begin reporting any meaningful revenues until mid-2018. Its limited operating history makes it difficult for us to evaluate cbdMD’s future business prospects and make decisions based on estimates of its future performance. To address these risks and uncertainties, we must do the following:
● | Successfully execute our business strategy to the highest quality CBD in the industry; |
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● | Introduce new, differentiated botanical products; |
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● | Respond to competitive business developments; |
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● | Effectively and efficiently market and sell our line of CBD products; |
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● | Improve the distribution of our CBD products; and |
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● | Attract, integrate, retain and motivate qualified personnel. |
Our business strategy may not be successful and we may not successfully address these risks. In the event that we were an unregistered investment company,do not successfully address these risks, our business, prospects, financial condition and results of operations may be materially and adversely affected.
THE MARKET FOR CBD PRODUCTS IS HIGHLY COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY AGAINST OUR COMPETITORS, OUR BUSINESS AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
cbdMD operates in a competitive and rapidly evolving market. While we believe that the industry is fragmented at the present time, there wouldare numerous competitors, including Green Roads, PlusCBD, and Select CBD in the retail of CBD-based products, and in the digital selling space Diamond CBD, CBDistillery, and LazarusNaturals, some of whom are larger and have a longer operating history and may have greater financial resources than cbdMD does. Moreover, we expect competition in the CBD industry to intensify following the passage of the Farm Bill in December 2018. In the future we may also face competition with larger, better capitalized companies who elect to enter the market given the relatively low barriers to entry. cbdMD believes that it competes effectively with its competitors because of the quality of its products and customer service. However, no assurance can be given that cbdMD will effectively compete with its existing or future competitors. In addition, competition may drive the prices of our products down, which may have a materially adverse effect on our results of operations in future periods.
LAWS AND REGULATIONS AFFECTING OUR INDUSTRY ARE EVOLVING UNDER THE FARM BILL, FDA AND OTHER REGULATORY AUTHORITIES AND CHANGES TO ANY REGULATION MAY MATERIALLY EFFECT OUR CBD OPERATIONS.
In conjunction with the enactment of the Farm Bill, the United States Food and Drug Administration (“FDA”) released a statement about the status of CBD as a nutritional supplement, and the agency’s actions in the short term with regards to CBD will guide the industry. The statement noted that the Farm Bill explicitly preserved the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug, and Cosmetic Act (FD&C Act) and Section 351 of the Public Health Service Act. As a nutritional supplement manufacturer, cbdMD is also striving to meet or exceed the FDAs Good Manufacturing Practice (GMP) guidelines. Any difficulties in compliance withexisting government regulation could increase our operating costs and adversely impact our results of operations in future periods.
In addition, as a result of the Farm Bill’s recent passage, we expect that there will be a risk, among otherconstant evolution of laws and regulations affecting the CBD industry which could affect cbdMD’s operations. Local, state and federal hemp laws and regulations may be broad in scope and subject to changing interpretations. These changes may require us to incur substantial costs associated with legal and compliance fees and ultimately require us to alter our business plan. Furthermore, violations of these laws, or alleged violations, could disrupt our business and result in a material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, in an action by the SEC, that we would be unable to enforce contracts with third parties or that third parties with whom we have contracts could seek to obtain rescission of transactions with us undertaken during the period it was established that we were an unregistered investment company.effect on our operations. In addition, we would no longer be able to conduct our business ascannot predict the nature of any future laws, regulations, interpretations or applications, and it is presently conducted which wouldpossible that regulations may be enacted in the future that will be directly applicable to our business.
THE ESTIMATED NATURE OF THE CONSIDERATION TRANSFERRED MEANS THAT ANY SUBSEQUENT CHANGES IN THE VALUATION MODEL OR INPUTS TO THE MODEL, MAY MATERIALLY IMPACT THE CURRENT CARRYING VALUES OF INTANGIBLES, GOODWILL AND CONTINGENT LIABILITIES.
Significant estimates have been utilized to value the consideration transferred in the Mergers with Cure Based Development. Estimates have been used in creating inputs for the Market Approach and Monte Carlo Simulation methods to value the intangibles and contingent liabilities. If these estimates or inputs were to change, they could have a material adverse impact on the trading pricecurrent carrying values of the intangibles, goodwill and contingent liabilities on our consolidated financial statements.
THE ISSUANCES OF THE SHARES OF OUR COMMON STOCK TO THE CURE BASED DEVELOMENT MEMBERS WILL SIGNIFICATLY DILUTE OUR EXISTING SHAREHOLDERS.
Upon the terms set forth in the Merger Agreement, on the Closing Date the members of Cure Based Development received contractual rights to receive 15,250,000 shares of our common stock, representing approximately 60% of our outstanding common stock following such issuance, as the consideration for the Mergers. The Merger Agreement also provides that we may issued up to an additional 15,250,000 shares of our common stock as part of the merger consideration upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date. As of the Closing Date, there were 10,095,396 shares of our common stock issued and outstanding. Our ability to issue these shares was approved at the annual meeting of shareholders on April 19, 2019. After the issuance of the first 15,250,000 shares, but giving effect to no other change to the number of shares of our common stock issued and outstanding or the possible issuance of additional 15,250,000 shares in future periods, the members of Cure Based Development would own 60.2% of our then outstanding shares of common stock. Therefore, the ownership and voting rights of our existing shareholders have been proportionally reduced.
ITEMITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In MayOn October 2, 2018 we issued 60,000closed a firm commitment underwritten follow-on public offering pursuant to which we sold 1,971,428 shares of our common stock valued at $303,000for aggregate gross proceeds of $6,899,998. ThinkEquity,a division of Fordham Financial Management, Inc., acted as compensationsole book-running manager for the offering. Wereceived approximately $6.3 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by us. We are using the net proceeds from the offering for brand development and expansion, acquisitions and general working capital.
On January 14, 2019, we entered into an Amendment to an investment banking firmAdvisory Services Letter Agreement with Maxim Group, LLC, a broker-dealer and member of FINRA (“Maxim”) pursuant to which we extended our current agreement for general financial advisory and investment banking services.services, from April 24, 2019 to April 30, 2020. As compensation, we issued Maxim 50,000 shares of our common stock which was valued at $212,500. The recipient wasis an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(a)(2) of that act.the Securities Act. The foregoing description of the terms and conditions of the Amendment to Advisory Services Letter Agreement with Maxim is qualified in its entirety by reference to the agreement, a copy of which is filed as Exhibit 10.85 to this report.
In June 2018On January 15, 2019, with an effective date of January 1, 2019, we entered into an Advisory Agreement with Joseph A. Gunnar & Co., LLC, a broker dealer and member of FINRA (“Gunnar”). Pursuant to the terms of the Advisory Agreement, which expires on December 31, 2019, we have retained Gunnar on a non-exclusive basis as our financial advisor and investment banker to provide general advisory services, including: (a) assisting us with strategic introductions and conduct of non-deal roadshows; (b) work with our management team to develop a set of long term and short term goals with a focus on enhancing shareholder value; and (c) providing us with such other financial advisory services as the parties may agree upon. As compensation, we issued Gunnar 25,000 shares of our common stock which was valued at $118,000 as compensation to a broker dealer for business advisory services.$77,250. The recipient wasis an accredited investor and the issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(a)(2) of that act.the Securities Act. The foregoing description of the terms and conditions of the Advisory Agreement with Gunnar is qualified in its entirety by reference to the agreement, a copy of which is filed as Exhibit 10.86 to this report.
ITEMITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable to our company’s operations.
ITEMITEM 5. OTHER INFORMATION.As previously disclosed, in July 2017 we sold Stone Street Partners, LLC, an affiliate of our Chief Executive Officer, shares of shares of a client company’s stock which was issued to us as partial compensation under the terms of the consulting agreement with that company. At closing, as partial payment Stone Street Partners, LLC tendered to us together a $275,000 principal amount 3% promissory note due July 31, 2018. On August 1, 2018, the Company extended the due date of the remaining outstanding principal of $155,400 to December 31, 2018 and Stone Street Partners, LLC tendered a new note to us, a copy of which is filed as Exhibit 10.74 to this report.
On July 10, 2018, the Company announced a licensing agreement under its subsidiary I’M1 with Gravocore, the first intelligent, portable, joint-friendly mounted fitness training machine, launched in 2017 in an exclusive partnership with Amazon. Under the terms of the five-year agreement, Gravocore will pay I’M1 annual brand participation fees, as well as an 8% royalty on net sales of all licensed products sold under the I’M1 brand.
ITEM 6. EXHIBITS.
| | | | Incorporated by Reference | | Filed or Furnished |
No. | | Exhibit Description | | Form | | Date Filed | | Number | | Herewith |
| | | | | | | | | | |
3.1 | | | | 1-A | | 9/18/17 | | 2.1 | | |
3.1(a) | | | | 1-A | | 9/18/17 | | 2.2 | | |
3.1(b) | | | | 1-A | | 9/18/17 | | 2.3 | | |
3.1(c) | | | | 1-A | | 9/18/17 | | 2.4 | | |
3.1(d) | | | | 1-A | | 9/18/17 | | 2.5 | | |
3.2 | | | | 1-A | | 9/18/17 | | 2.6 | | |
10.74 | | | | | | | | | | Filed |
31.1 | | | | | | | | | | Filed |
31.2 | | | | | | | | | | Filed |
32.1 | | | | | | | | | | Filed |
101 INS | | XBRL Instance Document | | | | | | | | Filed |
101 SCH | | XBRL Taxonomy Extension Schema | | | | | | | | Filed |
101 CAL | | XBRL Taxonomy Extension Calculation Linkbase | | | | | | | | Filed |
101 LAB | | XBRL Taxonomy Extension Label Linkbase | | | | | | | | Filed |
101 PRE | | XBRL Taxonomy Extension Presentation Linkbase | | | | | | | | Filed |
101 DEF | | XBRL Taxonomy Extension Definition Linkbase | | | | | | | | Filed |
46 |
| Incorporated by Reference
| |
No. | Exhibit Description
| Form | Date Filed
| Number
| Filed or furnished Herewith
|
| Merger Agreement dated December 3, 2018 by and among Level Brands, Inc., AcqCo, LLC, cbdMD LLC and Cure Based Development, LLC | 8K | 12/3/2018 | 2.1 | |
| Articles of Merger dated December 20, 2018 as filed with the Secretary of State of Nevada merging AcqCo, LLC with and into Cure Based Development, LLC | 10-Q | 02/14/2019 | 2.2 |
|
| Articles of Merger dated December 20, 2018 as filed with the Secretary of State of North Carolina merging AcqCo, LLC with and into Cure Based Development, LLC | 10-Q | 02/14/2019 | 2.3 |
|
| Articles of Merger dated December 20, 2018 as filed with the Secretary of State of Nevada merging Cure Based Development, LLC with an into cbdMD LLC | 10-Q | 02/14/2019 | 2.4 |
|
| Articles of Merger dated December 20, 2018 as filed with the Secretary of State of North Carolina merging Cure Based Development, LLC with an into cbdMD LLC | 10-Q | 02/14/2019 | 2.5 |
|
| Certificate of Incorporation | 1-A | 9/18/17 | 2.1 | |
| Certificate of Amendment to the Certificate of Incorporation – filed April 22, 2015 | 1-A | 9/18/17 | 2.2 | |
| Certificate of Amendment to the Certificate of Incorporation – filed June 22, 2015 | 1-A | 9/18/17 | 2.3 | |
| Certificate of Amendment to the Certificate of Incorporation – filed November 17, 2016 | 1-A | 9/18/17 | 2.4 | |
| Certificate of Amendment to the Certificate of Incorporation – filed December 5, 2016 | 1-A | 9/18/17 | 2.5 | |
| Amended and Restated Bylaws
| 1-A | 9/18/17 | 2.6 | |
| Form of leak out agreement
| 8K | 12/20/18 | 10.1 | |
| Form of voting proxy
| 8K | 12/20/18 | 10.2 | |
| 6% promissory note dated December 20, 2018 to Edge of Business, LLC
| 8K | 12/20/18 | 10.3 | |
10.82
| Executive Employment Agreement dated December 20, 2018 by and between cbdMD LLC and R. Scott Coffman
| 8K | 12/20/18 | 10.4 | |
| Executive Employment Agreement dated December 20, 2018 by and between cbdMD LLC and Caryn Dunayer | 8K | 12/20/18 | 10.5 | |
| Mutual Termination of License Agreement dated January 07, 2019 by and between Level Brands, Inc. and Isodiol International, Inc.
| 8K | 1/1/19 | 10.1 | |
| Amendment to Advisory Agreement dated January 14, 2019 with Maxim Group LLC | 10-Q | 02/14/2019 | 10.85 |
|
| Advisory Agreement dated January 15, 2019 with Joseph Gunnar LLC | 10-Q | 02/14/2019 | 10.86 |
|
| Amendment to Wholesale License Agreement dated September 8, 2017 by and between Level Brands, Inc., and kathy ireland ® Worldwide | 10-Q | 02/14/2019 | 10.87 |
|
| Certification of Principal Executive Officer (Section 302) | | | | Filed |
| Certification of Principal Executive Officer (Section 302) | | | | Filed |
| Certification of Principal Executive Officer and Principal Financial Officer (Section 906) | | | | Filed |
| Audited financial statements of Cure Based Development, LLC for the period of August 3, 2017 (inception) through December 31, 2017 and for the eight months ended August 31, 2018 | 8K | 12/20/18 | 99.1 |
|
101 INS
| XBRL Instance Document | | | | Filed |
101 SCH
| XBRL Taxonomy Extension Schema | | | | Filed |
101 CAL
| XBRL Taxonomy Extension Calculation Linkbase | | | | Filed |
101 LAB
| XBRL Taxonomy Extension Label Linkbase | | | | Filed |
101 PRE
| XBRL Taxonomy Extension Presentation Linkbase | | | | Filed |
101 DEF
| XBRL Taxonomy Extension Definition Linkbase | | | | Filed |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LEVEL BRANDS,cbdMD, INC. | |
| | | |
August 14, 2018May 15, 2019 | By: | /s/ Martin A. Sumichrast | |
| | Martin A. Sumichrast, Chief Executive Officer, principal executive officer | |
August 14, 2018May 15, 2019 | By: | /s/ Mark S. Elliott | |
| | Mark S. Elliott, Chief Operating Officer, Chief Financial Officer, principal financial and accounting officer | |